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Economics

India’s Central Bank Caught a Lucky Break

Low inflation and slower global growth warrant lower borrowing costs. Questions about independence can wait for another day. 

India’s Central Bank Caught a Lucky Break

Low inflation and slower global growth warrant lower borrowing costs. Questions about independence can wait for another day. 

The Fed handed RBI Governor Shaktikanta Das some political cover.

The Fed handed RBI Governor Shaktikanta Das some political cover.

Photographer: Indranil Mukherjee/AFP/Getty Images

The Fed handed RBI Governor Shaktikanta Das some political cover.

Photographer: Indranil Mukherjee/AFP/Getty Images

Call it beginner's luck.

India's interest-rate cut Thursday, a surprise to most economists, was justified: Inflation is well below target and growth is slowing across all major economies. In that regard, India is firmly in the mainstream.

Where India isn't in the mainstream is in the inability of a nominally pro-business government to hang on to a central bank head. Shaktikanta Das, who presided over his first monetary-policy meeting, is the third Reserve Bank of India governor to serve during Narendra Modi's tenure as prime minister. His two predecessors left after falling afoul of Modi's team.

That's where Das’s good fortune comes in. As Modi's third guy and a longtime civil servant, the whiff of politics will hover over much of what he does. With an election due by May, the government has been keen to see monetary easing. The vote on the Reserve Bank's panel was 4-2; one more dissent and the cut wouldn’t have happened.

Fortunately for Das, the decision to drop the tightening bias was unanimous. Then again, if you are going to deliver a surprise cut under a new governor, you might as well go all in.

Global economic currents and trends at home give RBI officials plenty of cover, regardless of Modi and happily for the governor. The Federal Reserve's pivot handed Asian central bankers an opportunity, as I wrote last week. Das took it.

It would be churlish to deny India’s monetary chief marks for boldness just because the ruling party burned through two predecessors. That wasn’t his fault.

There’s no point in trying to prove independence just to, well, prove independence. There will be other chances to demonstrate institutional separation from the cabinet. (When those opportunities present themselves, Das should embrace them.) 

Inflation is almost nowhere in India: Consumer prices rose just 2.2 percent in December, little more than half the Reserve Bank's medium-term target of 4 percent. Lackluster inflation is a global phenomenon right now and allows ample scope for the pronounced easing tilt among the world's monetary authorities.

While Das caught a rookie break, Modi and Finance Minister Arun Jaitley lost a crutch, for now. Das isn't presenting himself or his institution as a target. Not today.

This may yet be a winning tactic. If the government is looking for scapegoats in an election year, ministers will need to look further afield.

The RBI did the right thing. It was also lucky.

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Daniel Moss at dmoss@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net