Raghuram Rajan, former governor of the Reserve Bank of India (Photographer: Dhiraj Singh/Bloomberg)

Raghuram Rajan Says RBI’s Autonomy Must Be Respected

Former Reserve Bank of India Governor Raghuram Rajan on Tuesday called for respecting the institutional autonomy of the central bank adding that the RBI has the liberty to say no if the government pushes it to be lenient.

“The RBI is something like a seat belt,” Rajan told CNBC-TV18 in an interview. “As a driver, the driver being the government, it has the possibility of not putting on a seat belt but of course if you do not put on your seat belt you get into an accident and the accident can be quite severe.”

Ahead of the Nov. 19 RBI board meeting, Rajan said the objective of the board is to protect the institution and not serve others’ interests.

Historically, the relationship between the RBI and the government has been precisely this, the government wants to focus on improving growth and it does all it can within the limits set by the RBI which are based on financial stability, he added.

So, the government will push, will try and get the RBI to be more lenient...We have responsibility for financial stability and therefore we have an authority to say no.
Raghuram Rajan, Former Governor, RBI 

The RBI led by Governor Urjit Patel and the government have not been on the same page on different issues for some months now. The disagreements came out in open when Deputy Governor Viral Acharya, in a hard-hitting speech, said failure to defend central bank’s independence would “incur the wrath of the financial markets”.

It later emerged that the government used a never-before-used provision of the law to seek resolution of issues, including the easing of non performing asset norms, so that banks can kick-start lending and support growth, and transferring more dividend to boost liquidity -- issues which the central bank thinks cannot be relented.

Also read: Why The Government Thinks The RBI Has Rs 3.6 Lakh Crore In Excess Capital

Of course, the RBI doesn’t say no out of petulance. It says it because it has examined the situation and believes that this take implies too much financial instability.
Raghuram Rajan, Former Governor, RBI 

“I think that relationship has gone on for a long and the fact that the RBI says no is not new. The government can keep asking and say please consider this, please consider that but at some point, it says okay I respect your decision, you are the financial stability regulator and I back off”.

On the issue of the government citing Section 7 of the RBI Act that gives it powers to issue directions to RBI governor on issues of public interest, Rajan said it would be best if each side respected the other's motivation and thoughts.

“And ultimately the RBI after listening to the government and hearing what the government’s issues were provided the best professional answer it could and historically it has done that. I have no doubt it is doing that today. It has a responsibility to fulfill to the nation. It has to listen of course but at the end of it, after listening it has to make a decision because ultimately it has that responsibility,” he said.

On the problems facing non-banking finance companies, he said the central bank needs to examine the liquidity problem much closer and solve the issue by putting liquidity in the market. “I think the markets are somewhat nervous but I don't think given that NBFCs account for 17 to 18 percent of assets, that this is an unmanageable problem. I think we can manage it, we have to look carefully at it, see what is really a solvency issue, what is a liquidity issue.”

Also read: Government Versus RBI: Dissent At The Podium