Moody's cautions against curbing RBI autonomy on policy rates

Also raises red flag over Parliament logjam, says it is denting business confidence as key reform bills like land and GST are stuck

Moody’s on Thursday cautioned against tampering with the independence of the Reserve Bank of India (RBI) in deciding on interest rates, saying it would hurt India’s economic prospects.

Moody’s Analytics, an economic research unit of Moody’s Corp, raised a red flag over the Parliament logjam and said it was denting business confidence as key reform Bills like Land and Goods and Services Tax (GST) are stuck.

A revised draft of the Indian Financial Code calls for creation of an interest rate-setting panel, where majority of the seven members will be nominated by the government.

While the earlier version of the code gave the RBI governor veto power over panel’s decision, the revised draft does not confer any such powers on him.

“We believe a government-elected panel undermines RBI’s independence. Moving to the new model would severely dent the central bank’s competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced. Overall, we believe that tampering with RBI’s independence would make it difficult to anchor inflation expectations. This would weigh on India’s economic prospects, particularly financial market stability,” Moody’s Analytics said in a report.

It said India’s monetary policy, with Governor Raghuram Rajan at the helm, has been effective.

The report titled, “India’s Outlook: Waiting for Reforms to Fuel Growth”, said inflation has fallen, external accounts have improved, and the economy is poised for further rate cuts.

Terming the measure as a "dangerous road ahead", it said "a recent draft bill could undo the RBI's good work."

It, however, hoped that given the criticism of the draft Indian Financial Code bill, it is unlikely to pass Parliament.

Talking about reform measures of the Government, Moody's Analytics said: "India's political infighting is denting business confidence. Without a majority in the Upper House, the ruling BJP's power has been nullified and the opposition has blocked proposed reforms".

Key reforms such as the land acquisition bill, flexible labour laws, and the goods and services tax have failed to pass Parliament. "Given the political seesaw, these are unlikely to be delivered until later this year or even 2016," the report said.

The land acquisition bill is a catalyst to investment, it said, adding passing the bill will improve India's business environment by speeding up the conversion of land for infrastructure use. Foreign firms are wary of investing in India, as lengthy delays in acquiring land tend to stall projects.

Moody's Analytics is the economic research analysis unit of Moody's Corporation and is independent of Moody's Investor Service, the credit rating agency of the US-based firm.