In his last public speech before demitting office, Reserve Bank Governor Raghuram Rajan today made a vigorous case for a strong and independent central bank that can say ‘no’ to highest echelons of the government to ensure macroeconomic stability.
The outspoken RBI Governor, who completes his three-year term tomorrow and will return to academia, also pitched for elevating the ranking of central bank chief saying it is “dangerous to have a de facto powerful position with low de jure status.”
“The central bank should be independent and should be able to say ‘no’ to seemingly attractive proposals,” he said delivering a lecture on ‘Independence of the central bank’ at the St. Stephens College here.
But in the same breath he went on to say that 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.”
He said the ranking of the RBI governor, currently at par with Cabinet Secretary, needed to be commensurate with the role.
“There is a reason why central bank governors sit at the table along with the finance ministers in G-20 meetings,” he said.
Rajan, who had steered the biggest overhaul yet by the RBI including a switch to inflation-targeting under a monetary policy committee, said the 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.
Rajan, who has been vocal on issues like religious tolerance, said a central bank governor has to warn about the dangers of certain courses of action or certain tendencies in the economy for growth and macroeconomic stability.
“RBI Governor is also a role model for the youth in this country and should therefore not duck the responsibility to urge them to follow the highest standards of citizenship when he or she is invited to speak directly to them,” he said.