 "RaghuRam Rajan at Stephens College Photo: Sanjay Sharma")
Reserve Bank of India Governor Raghuram Rajan urged the government on Saturday to elevate the rank of the governor, while defending the need to ensure independence of the institution, in his last public speech before his departure.
“There is a reason why central bank governors sit at the table along with the finance ministers in G-20 meetings,” Rajan said while addressing students in Delhi’s St. Stephen’s college. “There may be some virtue in explicitly setting the governor’s rank commensurate with her position as the most important technocrat in charge of economic policy in the country.” At present, the RBI governor’s rank is that of a minister of state.
Hoping that the measures the RBI took under him will stand the test of time, Rajan 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 Reserve Bank cannot just exist, its ability to say “No!” has to be protected,” said Rajan. “At the same time, the central bank cannot become free of all constraints, it has to work under a framework set by the government.”
The speech also turned out to be a perfect farewell for Rajan, who is returning to academia, as scores of university students flocked him for autographs and selfies like a rock star. Rajan demits office on Sunday, after which Urjit Patel will take over as RBI’s 24th Governor.
“I believe we have undertaken important reforms in payments, in banking, in the conduct of monetary policy and liquidity management, in financial markets, and in the resolution of distress, as well as within the RBI itself. Only time will tell whether they will have lasting impact, but I tried to do the best job I could, without fear or favour,” Rajan said. A copy of the speech was made available on the central bank’s website.
Elaborating how raising foreign currency resources through FCNR (B) deposits was not the best of ideas, but in the lack of any good plan, it was better among the bad ones, Rajan said “policymaking is about deciding in the face of uncertainty, after weighing the alternatives as best as one can.”
“On the day I was to take over, with no good options on the table, I had to choose the least bad one. I decided to go ahead.” Banks raised $26 billion through the FCNR (B) deposits and about $6-7 billion through tier-1 capital. “The rupee has been one of the most stable emerging market currencies since then,” he said. Taking advantage of cheap hedge cost after the Lok Sabha election results, RBI covered the forward swaps “cheaply”.
“We are fully covered for outflows today and have made money on the deal,” Rajan said. The Indian rupee had tumbled to its record lows of Rs 68.85 a dollar on August 28, 2013 but stabilised after Rajan announced the FCNR (B) measures upon his assuming his office on September 4 that year.
“Clearly, we do not want to be in the position we were in August 2013 ever again. Macroeconomic stability is of paramount importance for India. Equally clearly, drawing from this experience, the central bank must have the resources, the knowledge, and the professionalism to act when the situation warrants,” Rajan told the students, adding, to have such qualities, the country should have a “strong and independent RBI to ensure macroeconomic stability.”
“Growth is good, but growth with stability is better, especially in a poor country where so many people live at the margin.”
For the RBI, it means ensuring growth does not exceed the country’s potential, adopting prudential policies that reduce risk, and building sufficient buffers that the country is protected against shocks.
But by doing so, RBI gets exposed to criticism. “If we try and bring down inflation, interest rates will remain higher than borrowers desire. If inflation comes down, the currency will depreciate less than some exporters desire. If we push the banks to clean up, banks may be less tolerant towards habitual non-payers. Whatever we do, someone will object.”
“The RBI then becomes the favourite scapegoat for under performance… However, unlike the complainants, the RBI does not have the luxury of economic inconsistency.” The monetary policy framework and the mandate to the central bank to protect a level of inflation, does protect RBI from certain criticism. “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 objectives.” However, RBI’s role in macroeconomic stability is “still fuzzy.” While RBI clearly has responsibility for the safety and soundness of credit institutions and the stability of the external account, “there are some areas that are hazier.” For example, in an inflation-focused framework, RBI’s ability to cut rates depends on fiscal prudence from the Centre and states. “How much should the RBI warn on fiscal profligacy, including the building up of contingent liabilities, and when should such warning be seen as interfering in the legitimate decisions of the elected representatives of the people? This is an area where clarity would be useful.”
He also criticised the oversight of government entities in the internal work of RBI. “Multiple layers of scrutiny, especially by entities that do not have the technical understanding, will only hamper decision making,” he said. Instead, the government-appointed RBI Board, which includes government officials as well as government appointees, should continue to play its key oversight role.
“This is the last public speech I will give in India for a while — my successor has to take over the RBI’s communication and I want to get out of his way. It has been an honour to work for the country and especially to talk to people like you, its future. Thanks for listening to me,” Rajan concluded as saying.
With agency inputs
