RBI’s abil­ity to say ‘no’ to govt must be pro­tected: Ra­jan

The Financial Express - - FRONT PAGE - Press Trust of In­dia

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.

PTI

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

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