Raghuram Rajan pitches for RBI Autonomy

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In his last public speech a day before demitting office, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Saturday that not only should the central bank be independent, but its ability to say ‘no’ should also be protected.

He also said the RBI Governor’s rank should be clearly set “as the most important technocrat in charge of economic policy in the country”. Speaking at St Stephen’s College, Rajan said he tried to do the best job “without fear or favour”.

Recalling his predecessor D Subbarao’s comments on policy differences with the government, Rajan said he “would go a little further” as he believed that “the Reserve Bank cannot just exist, its ability to say ‘no’ has to be protected.”

“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.

He said the government should clearly state the rank of the RBI Governor. “There is a reason why central bank governors sit at the table along with the finance ministers in G-20 meetings. It is that the central bank governor, unlike other regulators or government secretaries, has command over significant policy levers and has to occasionally disagree with the most powerful people in the country,” he said.

“It is dangerous to have a de facto powerful position with low de jure status. Today, the RBI Governor has the salary of the Cabinet Secretary. The governor’s rank in the government hierarchy is not defined, but it is generally agreed that decisions will be explained only to the Prime Minister and the Finance Minister,” Rajan said.

While there is an informal understanding in India that the RBI Governor has the room to make decisions, in the interests of macroeconomic stability, “there may be some virtue in explicitly setting the RBI Governor’s rank commensurate with her position as the most important technocrat in charge of economic policy in the country,” he said.

He further said that 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.

Instead, 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 with regard to decisions such as budgets, licences, regulation and supervision.

Stating the macroeconomic stability is of paramount importance, Rajan said the central bank must have the resources, knowledge and professionalism to act when the situation warrants. Rajan said when the responsibilities of the RBI are fuzzy, its actions can continuously be questioned. “Instead, if the constitutional authorities outline a framework for the responsibilities of the RBI, it can take actions consistent with those responsibilities and be held to outcomes,” he said.

“The inflation objectives recently set for the RBI by the government are an example of what is needed. Critics can lambast the RBI if it fails continuously to meet the objectives, but if they want it to lower interest rates even when the RBI barely meets its objectives, they should instead petition the government to change the objectives,” he said.

Rajan also rejected the demand that the RBI should pay special dividend to the government, over and the above the surplus transfer every year, as suggested by Chief Economic Advisor to the finance ministry Arvind Subramanian. He instead made a case for transferring to the government the entire surplus of the RBI, retaining just enough buffers that were consistent with good central bank risk management practice.

“There are no creative ways of extracting more money from the RBI — there is no free lunch. Instead, the government should acknowledge its substantial equity position in the RBI and subtract it from its outstanding debt when it announces its net debt position. That would satisfy all concerned without monetary damage,” he said.

Rajan said the RBI has undertaken important reforms in payments, banking, conduct of monetary policy and liquidity management, financial markets, and resolution of distress, as well as 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 concluded.

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