Outgoing Reserve Bank of India Governor Raghuram Rajan on Saturday said, India needs a strong and an independent RBI to ensure macroeconomic stability, which is of paramount importance. Delivering a lecture on ‘independence of the central bank’ at the St. Stephens College here, the outgoing governor said the central bank cannot be free of all constraints as it has to work under a framework set by the government.
Recalling his predecessor D Subbarao’s comments on policy differences with the government, 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.”
Rajan further added that paying special dividend out of its (RBI) surplus to government will not help address budgetary constraints. “RBI has to work under a framework set by government and cannot be free of all constraints,” he added.
He also explained the economic rationale behind why the RBI cannot pay special dividend to the government in addition to the entire surplus being paid out for last three years.
Rajan’s term ends on September 4, after which Urjit Patel will take over as the Governor of the Central Bank. In one of his first comments since Patel’s was named by the government, Rajan had said, “I am confident that Urjit Patel, who has worked closely with me on monetary policy for the last three years, will ably guide the Monetary Policy Committee going forward in achieving our inflation objectives.”
Rajan had previously indicated his willingness to remain at the helm of central bank to finish pending tasks, but was unable to reach a deal with the government. When he was asked why he didn’t reach an agreement with the government on a second term, Rajan said he saw it as a three-year duty even though some differences may have cropped up over period of his extension. “There were variety of places where differences may have been in terms of horizons and this and that. I think we just didn’t reach an agreement where … remember my term came to an end, so it had to be a new term.” Rajan said he was engaged in a dialogue with the government “whether it made sense for me to continue.”
Rajan also faced flak from the government after his speech on the growing intolerance in the country. Rejecting criticism of having spoken ‘out of turn’ on various occasions, Rajan said it was the ‘legitimate duty’ and ‘moral responsibility’ of public figures to tell young minds what good citizenship is about and the virtues of tolerance.
Asked about what he had in mind when he made the speech at IIT-Delhi in October last year, Rajan said, “… I had the environment certainly at the back of mind where there was a discussion certainly about tolerance.”
In one of his recent statements on the Indian economy, Rajan highlighted the upside risks to inflation and said that the Indian economy is still growing below its potential. According to him, the key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors.
(With PTI and ENS inputs)