An autonomous central bank can fight the inflationary pressures resulting from deficit spending
Why should central banks be autonomous and what are the consequences of the government infringing on such autonomy? This issue is front and centre not only in India but also in the US, where President Donald Trump has been engaging in a Twitter war with the Federal Reserve against its policy of raising interest rates. Interestingly, the Republicans complaining now were also railing against Ben Bernanke for keeping interest rates too low for too long when Barack Obama was the president. In India, the markets reacted with a murmur to the resignation of the Reserve Bank of India (RBI) governor and his replacement by an ex-bureaucrat who clearly is aligned with the current government’s agenda. This naturally raises questions as to whether central bank autonomy is all that it is cracked up to be.