Former RBI chief Raghuram Rajan backs RBI's autonomy call
06 November 2018
Former governor of the Reserve Bank of India, Raghuram Rajan, has defended the central bank’s call for greater autonomy from the government, comparing the government’s position as a call for driving without a seat belt.
Rajan’s comments come after the rift between the RBI and the government spilled into the public domain after deputy governor Viral Acharya said last month that undermining central bank’s independence could be "potentially catastrophic."
There is widespread resentment in RBI circles, indicating the authority is pushing back against government pressure to relax its policies and reduce its powers ahead of a general election due by May.
In an interview on CNBC-TV 18 telecast on Tuesday, Rajan said current rift between the central bank and the government can be resolved if both sides respect each other’s intent and autonomy.
“As far as possible, it is in the interest of the country that we respect the institutional autonomy of the Reserve Bank, as well as the traditions,” Rajan, who was succeeded by current governor Urjit Patel in September 2016, said.
While Rajan commended Acharya for warning of risks stemming from government meddling of central bank affairs, he said the RBI could inject liquidity to ease any cash crunch at financial institutions, backing government’s view also in part.
“If it’s a liquidity problem, the central bank can flood the market with liquidity or give the liquidity to specific private entities that are healthy, and are willing to lend to these other entities that are in trouble,” Rajan, a former chief economist at International Monetary Fund said in the interview.
RBI’s reluctance to bail out loss-making banks and non-banking finance companies and the government’s demand for increased role in RBI’s business heightened tensions between the two sides.
Things came to a head last month after a scathing speech by deputy governor Viral V Acharya came out in the open stating the central bank’s position on monetary policy and procedures.
Many viewed Acharya’s comments as a sign that the RBI was pushing back hard against government pressure to relax its policies and reduce its powers ahead of a general election due by May.
Finance minister Arun Jaitley, in turn, criticised the central bank for failing to check indiscriminate lending during 2008 and 2014 that has led to the present bad loan or non-performing asset (NPA) crisis in the banking industry.