Gold Silver Reports — Rajan Parting Shot: Protect RBI’s freedom to Say `No’ — Reserve Bank of India (RBI) governor Raghuram Rajan made a strong case for central bank independence on Saturday and said the governor’s rank should be commensurate with his position.
In his last public speech as RBI governor, Rajan argued for operational freedom of the central bank.
“Multiple layers of scrutiny , especially by entities that do not have the technical understanding, will only hamper decision making,“ he said, suggesting that, instead, 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 environment, where the central bank has to occasionally stand firm against the highest echelons of central and state government, 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.’“ “I would go a little further.The Reserve Bank cannot just exist, its ability to say `no’ has to be protected. At the same time, the central bank cannot become free of all constraints, it has to work under a framework set by the government,“ Rajan said during a talk at St Stephen’s College which was out of bounds for the media.
“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,“ said Rajan, who will return to academia in the US after handing over charge to successor Urjit Patel.
“The inflation objectives recently set for the RBI by the government are an example.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 objective,“ he said.
Rajan also made a case for revisiting the rank of a RBI governor.
“…there may be some vir tue 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.
He also defended the need for RBI governors to communicate with stakeholders.
“For instance, even as I explained to entrepreneurs and retail borrowers why interest rates were not falling faster, I had to use the price of dosas to explain to pensioners why they were actually better off earning lower nominal but higher real interest rates. Public understanding can… increase support for policies,“ he said.
Rajan explained that paying a special dividend over and above the surplus that the RBI generated, as had been suggested by some commentators, was legally not possible. “The bottom line is that the RBI should transfer to the government the entire surplus, retaining just enough buffers that are consistent with good central bank risk management practice. Indeed, this year the board paid out an extra Rs 8,000 crore than was promised to the government around budget time. Separately, the government can infuse capital into the banks,“ he said.
“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. — Neal Bhai Reports