RBI’s ability to say ‘no’ to govt must be protected: Rajan
IN his last public speech before demitting office, Reserve Bank of India (RBI) governor Raghuram Rajan on Saturday made a vigorous case for a strong and independent central bank that can say ‘no’ to the highest echelons of the government to ensure macroeconomic stability.
The outspoken RBI governor,whocompleteshisthreeyear term on Sunday and will return to academia, also pitched for elevating the rank of the RBI chief, saying it is “dangerous to have a de facto powerful position with low de jure status”.
“The central bank should be independent and should be able to say ‘no’ to seemingly attractive proposals,” he said delivering a lecture on ‘Independence of the central bank’ at the St Stephen’s College in New Delhi.
But in the same breath he went on to say that the central bank cannot be free of all constraints as it has to work under a framework set by the gover nment.
Recalling his predecessor D Subbarao’s comments on policy differences with the gover nment, 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”.
He said the rank of the RBI governor, currently at par with the 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 the 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.
“In this environment, where the central bank has to occasionally stand firm against the highest echelons of central and state governments, (I) recall the words of my predecessor, Dr Subbarao, when he said, ‘I do hope the finance minister will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone’. But thank God, the Reserve Bank exists,” the outgoing RBI governor said.
On various entities seeking oversight over the central bank’s activities, he said the government-appointed RBI Board, which includes ex-officio government officials as well as government appointees, should continue to play its key oversight role.
“In this regard, all important RBI decisions including budgets, licences, regulation and supervision are now either approved by the board or one of its sub-committees. Vacancies in the RBI board, which have remained unfilled for many months now, should be filled quickly so that the full expertise and oversight of the Board can be utilised,” he said. “It is the central bank governor, unlike other regulators or government secretaries, who has command over significant policy levers and has to occasionally disagree with the most powerful people in the country,” Rajan added.
The RBI governor’s rank in the government hierarchy is not defined but it is generally agreed that decisions will only be explained to the Prime Minister and the finance minister. There is an informal understanding in India that the RBI governor has the room to make needed decisions.
“In the interests of macroeconomic stability, none of this should be changed, though if these issues are ever revisited, there may be some virtue in explicitly setting the governor’s rank commensurate with the position as the most important technocrat in charge of economic policy in the country,” he said.
Outgoing RBI governor Raghuram Rajan with wife Radhika after addressing students of St Stephen’s College, his last public speech as governor, in New Delhi on Saturday