As India steps into 2026, the macroeconomic picture appears unusually comfortable. Growth is robust, inflation is benign, and financial stability risks seem contained — a rare “Goldilocks” phase, as described by the Governor of the Reserve Bank of India . Yet it is precisely because conditions are calm that India has a unique opportunity to confront one of its most persistent structural problems: the conflicted and opaque relationship between the RBI and the Ministry of Finance .
Capital costs after labour reform
With major labour reforms now largely in place, the next constraint on sustained high growth is the cost of capital. India needs deeper financial markets, better credit allocation and a vibrant corporate bond market to support investment and productivity. However, these objectives are hampered by India’s unusual financial architecture, where the RBI simultaneously acts as regulator, monetary authority and government debt manager, while the government remains the dominant borrower and owner of public sector banks (PSBs).
This “nested” relationship may have been administratively convenient in the past, but it now generates conflicts of interest that weaken regulation, distort markets and raise capital costs.
An uneasy institutional marriage
The RBI–Finance Ministry relationship is often likened to a traditional marriage: separation is unthinkable, disagreements are handled privately, and when disputes surface, the government’s view usually prevails. Occasionally, however, tensions spill into public view.
A defining episode followed the massive fraud at Punjab National Bank in 2018. Then finance minister Arun Jaitley publicly blamed the RBI for supervisory failure. The central bank responded that its regulatory powers over PSBs were limited — a claim borne out by subsequent experience. Between FY16 and FY25, PSBs wrote off roughly ₹12 trillion in loans, far exceeding stress in private banks.
Regulating banks you do not control
At the heart of the problem lies a basic contradiction. The RBI vets and approves the leadership of private banks under “fit and proper” norms, but has no such authority over PSB chiefs, who ultimately report to the Finance Ministry. This weakens accountability and blunts regulatory discipline.
The conflict deepens because RBI officials sit on PSB boards. In effect, the regulator becomes part of the entity it supervises, blurring responsibility and diluting oversight. Committees have long flagged this anomaly. As early as 1998, the Narasimham Committee-II recommended removing RBI nominees from PSB boards and professionalising governance. Yet both the government and the RBI resisted change, preferring institutional comfort over clarity.
The deeper fault line: debt management
Even more consequential is the RBI’s role as the government’s debt manager. As manager of public borrowing, the RBI has an incentive to keep interest rates low to reduce the government’s financing costs. As a monetary authority, however, it is meant to prioritise inflation control and financial stability. These objectives are not always compatible.
This conflict is reinforced by India’s reliance on the statutory liquidity ratio (SLR), which compels banks to hold a fixed share of their deposits in government securities. Although the SLR has fallen from nearly 40% in the 1980s to 18% today, India remains among the few countries still using it extensively. The result is a form of financial repression that crowds out private credit and stunts bond market development.
The evidence is stark. Private credit in India is around 50% of GDP, far below peers such as Vietnam, Thailand and Malaysia, where it exceeds 100%. Shallow markets raise borrowing costs for