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This article is more than 2 year old.

Any attempt by government to curtail central bank's independence credit negative: Moody's

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In the backdrop of RBI Governor Urjit Patel's resignation, Moody's Investors Service on Monday said the independence of a country's central bank is an important consideration while assessing a country's institutional strength and any attempt by the government to curtail it would be credit negative.

Any attempt by government to curtail central bank's independence credit negative: Moody's
In the backdrop of RBI Governor Urjit Patel's resignation, Moody's Investors Service on Monday said the independence of a country's central bank is an important consideration while assessing a country's institutional strength and any attempt by the government to curtail it would be credit negative.
Patel on Monday resigned from the post citing personal reasons. Patel, whose three-year term was to end in September 2019, is the first governor since 1990 to step down before his term ended.
To a query on the sovereign rating impact of the developments around RBI, Moody's said, "While the motivation for the RBI Governor's resignation is unclear, the independence of a country's central bank is an important consideration in our assessment of a sovereign's institutional strength."
It said that Moody's assumes that the RBI will continue to pursue price and financial stability and implement policies towards these goals.
"We would consider signs that the government attempts to curtail the central bank's independence to be credit negative. That said, our assessment of institutional strength ultimately focuses on the quality and policy outcomes of the institutions themselves, not on the individuals leading them," Moody's Investors Service said.
"The sudden resignation will lead to questions about whether the government is trying to stifle institutions and whether the resignation is a statement to protect the RBI's independence," Brokerage firm Nomura said in a statement.
"This, along with the lack of policy coordination between the RBI and the government, will mean higher India risk premium, at least in the short term, in an environment where domestic political uncertainty is anyway on the rise owing to the elections," the report said.
Patel's resignation came just four days ahead of the December 14 meeting of the Reserve Bank that could have discussed issues of simmering differences with the government.
Although Patel cited personal reasons for the resignation but industry watchers say there were undercurrent since the the government cited hereto never-used-before provisions of the law to bring him to negotiating table on issues it felt were of national interest.
The friction between the RBI and the Finance Ministry was attributed to the recalcitrance of Patel, who appeared keen to be seen as a defiant, independent-minded governor of high credibility by resisting the government's call for increased transparency on the central bank's reserves (just how much is necessary for stability operations) and for enhanced liquidity so that credit can be eased to money-strapped sectors especially MSMEs.
 
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