Yes, RBI must get to say no to govt: Raghuram Rajan

Delivering a lecture on ‘independence of the central bank’ at the St. Stephens College here, Rajan said the Central bank cannot be free of all constraints as it has to work under a framework set by the government.

Recalling his predecessor D Subbarao’s comments on policy differences with the government, Rajan said he “would go a little further” as he believes that “the Reserve Bank cannot just exist, its ability to say ‘no’ has to be protected.” Rajan further added that paying special dividend out of its (RBI) surplus to the government will not help address budgetary constraints. “RBI has to work under a framework set by the government and cannot be free of all constraints,” he added.

The RBI Governor, who completes his three-year term on Sunday and will return to academia, also pitched for elevating the ranking of Central bank chief saying it is “dangerous to have a de facto powerful position with low de jure status.” He said the ranking of the RBI Governor, currently at par with Cabinet Secretary, needed to be commensurate with the role.

“There is a reason why Central bank Governors sit at the table along with the Finance Ministers in G-20 meetings,” he said.

Rajan, who had steered the biggest overhaul yet by the RBI including a switch to inflation-targeting under a monetary policy committee, said the freedom to take operational decisions is important for the Central bank.

“However, there are always government entities that are seeking oversight over various aspects of RBI’s activities. Multiple layers of scrutiny, especially by entities that do not have the technical understanding, will only hamper decision making,” he said.

Rajan, who has been vocal on issues like religious tolerance, said a Central bank Governor has to warn about the dangers of certain courses of action or certain tendencies in the economy for growth and macroeconomic stability.

“RBI Governor is also a role model for the youth in this country and should, therefore, not duck the responsibility to urge them to follow the highest standards of citizenship when he or she is invited to speak directly to them,” he said.

On his tenure, he said under him the Central bank had undertaken important reforms with regard to payments and banking system, conduct of monetary policy, liquidity management, financial markets, resolution of distress, besides bringing changes within the RBI itself. “Only time will tell whether they will have lasting impact, but I tried to do the best job I could, without fear or favour,” he said adding, this was his last public speech as the RBI Governor.

“In a poor country like India where so many people live at the margin, the role of the Central bank was to ensure that growth did not exceed the country’s potential, adopting prudential policies that reduce the risk, and building sufficient buffers that the country was protected against shocks,” Rajan said. He said unlike a developed country, where the Central bank chief can offer periodic Delphic pronouncements about the course of monetary policy and occasionally remonstrate with Parliament or the government about the course of fiscal policy, in India the RBI Governor has to continuously make the case for the actions the Central bank is taking, including the many structural reforms that are underway.