With the tension between the Reserve Bank and the finance ministry rising in recent weeks, former RBI Governor Raghuram Rajan Tuesday said the central bank is like a seat belt in a car, without which accidents happen.
Pitching for respecting the institutional autonomy of the central bank, he said RBI has the liberty to say no if the government pushes it to be lenient.
“The RBI is something like a seat belt. 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,” he told CNBC TV18.
Ahead of the November 19 meeting of RBI Board, he 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.
“So, the government will push, will try and get the RBI to be more lenient,” he said, adding the central bank would examine them in close details and in reference to risks to financial stability. “We (RBI) have responsibility for financial stability and therefore we have an authority to say no,” he said.
The disagreements between RBI and the government came out in open when RBI 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 had used a never-before-used provision of the law to seek resolution of issues, including the easing of NPA 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.
“Of course the RBI doesn’t say no out of petulance. It says it because… (it) believes that this take implies too much financial instability,” Rajan said. “I think that 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”. With PTI.