Why India's Government and Central Bank Are Feuding

The U.S. Federal Reserve is hardly the only central bank in the world feeling the heat from political leaders. The Reserve Bank of India has often been at odds with the nationalist government of Prime Minister Narendra Modi, which since taking office in 2014 has periodically accused the bank of not doing enough to boost economic growth. With a general election approaching, the discord began to worsen markedly. However, signs of a truce -- perhaps just a temporary one -- have emerged.

The long-simmering rift erupted anew in October when a top RBI official warned of “economic fire” if the bank’s independence were compromised. Finance Minister Arun Jaitley didn’t directly respond to the comments but a few days later criticized the central bank, saying it (and the previous government) “looked the other way” while banks lent indiscriminately in the aftermath of the global financial crisis. The government has also indicated it is looking at a never-used legal provision that could possibly lead to the state overriding the central bank’s decision-making if invoked, according to people familiar with the matter.