In the backdrop of RBI Governor Urjit Patel's resignation, Moody's Investors Service 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.
Analysts have said the surprise end to Urjit Patel's term as RBI governor is likely to spook not only equity investors, but the currency markets as well on December 11, experts suggest.
Although the reaction could be short-lived, as the market is expected to shift focus from Urjit Patel's resignation to assembly election results, which will be a key indicator of sentiments ahead the 2019 general elections.
Patel 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.
Patel's resignation came just 4 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 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.
In November, the Reserve Bank of India (RBI) board held a marathon meeting amid a rift between the central bank and the government over several issues, including how much capital the RBI needs, lending norms for small and medium enterprises (SMEs) and rules for weak banks.
The RBI has massive Rs 9.59 lakh crore reserves and the government, if reports are to be believed, wants the central bank to part with a third of that fund — an issue which along with easing of norms for weak banks and raising liquidity has brought the two at loggerheads in recently.
Meanwhile, amidst reports of friction between the central bank and the finance ministry over several issues, including how much capital the apex bank needs, IMF's Chief Economist Maurice Obstfeld has said, the Indian government must heed the RBI's message on financial stability.
The next board meeting would be held later this week.
Addressing a group of journalists here on Sunday, he also said the International Monetary Fund does not want politicians "manipulating" central banks for political ends.
"There is debate over whether it's better for financial stability to be the remit of the central bank or an independent regulator…the UK in 1997, split them, then put them back together again," he said, responding to a specific question on the recent developments in India regarding the RBI and the Government.
"I'm not going to take a position on that…But I think…the central bank does have to be intimately concerned with financial stability to some degree and with the payment system," he added.
"We need to think about what is the best institutional framework in which financial policy can be set with regard to long term stability of the economy, not just to performance over political horizon," Obstfeld said.
"Well, I think they (the RBI and the Indian government) have reached an agreement on how to proceed. I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that," he added.
Responding to a series of questions on the attempt in certain countries like the US, India, Argentina and Turkey to curb independence of central banks, Obstfeld said central banks' role as a financial regulator is critical. Central banks have "much greater power than you thought". They are fundamentally involved in financial stability policy, in fiscal policy, he said.
Obstfeld said if one looks at the record, the decisions taken by central banks worldwide did stabilise the economy by avoiding much worse losses in output and employment.