Monetary sovereignty in chains: The Fed's grip on global central banks

By late 2023, India had all the makings of a rate-cutting cycle. Consumer inflation had settled comfortably below 5 per cent, core inflation had eased further, and the economy, despite healthy headline growth, was showing signs of uneven recovery. Real interest rates were among the highest in the G20, stifling private investment and compressing credit demand. Yet the Reserve Bank of India refused to cut rates.
It was only in February 2025, following a change in leadership, that the RBI finally relented. By that time, however, the cost of delay had been felt across India’s economic landscape: in weak industrial credit, dampened capital formation, and the prolonged distress of MSMEs and leveraged households. The inflation mandate had long been met. The growth mandate had gone unmet.
Even today, after multiple rounds of easing, India’s real interest rates remain among the highest in the world. With the repo rate at 5.5 per cent and consumer inflation at just 2.1 per cent – the lowest in over six years – India's monetary stance is still deeply restrictive.
The culprit? A monetary policy framework held hostage by Federal Reserve cycles. And a Reserve Bank that has yet to find the tools or imagination to break free.

How Fed became the grand master of central banking
If there has been one cornerstone of central banking, it is the concept of central bank independence. This principle grants central banks the autonomy to set interest rates based solely on domestic economic conditions, free from political pressure and short-term government priorities. Independent central banks can focus on their mandates of price stability and growth without external interference.
Yet today, this independence faces an existential threat. Not from domestic political interference, but from something far more insidious: the Federal Reserve's de facto control over global monetary policy. Central banks from New Delhi to Tokyo find themselves trapped in a reactive cycle, forced to shadow Fed decisions regardless of their own economic conditions. When the Fed tightens, they must tighten, not because their economies demand it, but because financial markets will punish divergence with capital flight and currency collapse.
This transformation began after 2008. The global financial crisis triggered an unprecedented expansion of the Fed's balance sheet, from under USD 1 trillion to over USD 4 trillion through successive rounds of quantitative easing. This flood of dollar liquidity poured into emerging markets, fuelled offshore dollar credit, and inflated global risk assets. The 2020 pandemic response shattered any remaining constraints, with another USD 5 trillion surge pushing global dollar liquidity to unprecedented levels.
The consequences were structural. Corporations across emerging markets gorged on cheap dollar debt, while global investors built vast carry trades dependent on continued access to ultra-low U.S. funding costs. The sheer scale of these dollar-denominated exposures made global economies hypersensitive to any shift in Fed policy.
When combined with portfolio flows sensitive to rate differentials, any Fed policy stance change triggers capital movements of a magnitude that overwhelms domestic central banks' ability to control or cushion the impact.
Essentially, the Fed has flooded the global system with so many dollars that all other monetary conditions have become subservient to its policy cycles.
What was once American influence over global markets had become near-total dependence on American monetary policy. Central banks retain the appearance of independence while surrendering the substance of autonomous decision-making to Washington's monetary whims.

What happens when you don't do as the Fed does
Central banks that diverge from the Federal Reserve face immediate and disproportionate consequences visible in currency markets, capital flows, and domestic economic distress.
The Reserve Bank of India's reluctance to cut rates in 2023, despite easing inflation and among the highest real rates in the G20, illustrates this perfectly. Had the RBI cut rates while U.S. Treasury yields exceeded 5 per cent, the rupee would have faced severe pressure as portfolio flows exited for better returns. Currency depreciation would have raised import costs and inflation risks, forcing an embarrassing policy reversal that would have dented the RBI's credibility.
Yet the cost of conformity was equally severe. The manufacturing sector remained sluggish, with industrial credit growth weaker than expected. Startups endured a funding winter exacerbated by tight domestic liquidity. Most critically, India missed a crucial window in 2024 to front-load monetary support without inflationary consequences, a delay that prolonged economic weakness unnecessarily.
Other central banks also faced the same issue. Japan maintained accommodation as the Fed tightened and saw the yen plunge to a thirty-two-year low, forcing USD 60 billion in currency interventions. Even China, with its capital controls, could not escape as the renminbi lost over 8 per cent against the dollar.
In each case, the outcome is identical: external pressure trumps domestic logic. Central banks retain the theatre of independence while surrendering the substance of autonomous decision-making to Washington's monetary cycle.

Breaking free from the Fed's grip
Escaping the Federal Reserve's monetary stranglehold requires bold institutional innovation. Three pathways offer genuine alternatives to perpetual policy subordination.
Targeted capital controls remain the most direct lever for restoring monetary sovereignty. Controls on short-term portfolio flows can insulate domestic policy from global sentiment reversals.
Innovative central banking architecture offers a sophisticated alternative. The RBI could delink policy rates from bank lending rates through creative liquidity management. Variable cash reserve ratios, targeted repo operations, or sector-specific refinancing could ease conditions for priority sectors while maintaining headline rates to satisfy currency markets.
Macroprudential innovation provides the third pillar. Dynamic loan-to-value ratios, countercyclical capital buffers, and sector-specific guidelines can substitute for interest rate policy in managing credit cycles.
These tools require political will and technical sophistication but offer the only realistic path to monetary sovereignty in a dollar-dominated world.

The price of monetary colonialism
The Federal Reserve's stranglehold over global monetary policy threatens both domestic prosperity and global financial stability. When central banks worldwide must dance to Washington's tune, the result is synchronised movement toward either collective overheating or coordinated stagnation. The Fed optimises for American conditions, not global growth.
For individual countries, the costs are severe. India's manufacturing stagnation and startup funding winter are direct consequences of this monetary subjugation. When the RBI cannot cut rates during growth slowdowns because of currency concerns, Indian businesses pay for America's monetary priorities.
The broader danger lies in systemic risk. When dozens of central banks move in lockstep, the next financial crisis will likely be more severe precisely because central banks have surrendered their capacity for independent response.
The Reserve Bank of India must urgently reclaim genuine policy independence through institutional tools and political courage. Until the RBI breaks free from the Fed's gravitational pull, Indian prosperity will remain subordinated to Washington's priorities.

Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ