RBI is Like Seat-Belt, Will Prevent Accident: Raghuram Rajan

On the public spat between the RBI and govt, Rajan said that both parties needed to respect each other’s authority.

Former RBI governor, Raghuram Rajan. 

(Photo: PTI)

The Reserve Bank of India (RBI) can be likened to a car seat-belt, with the Central government functioning as the driver, says former RBI-governor, Raghuram Rajan.

In an interview with The Economic Times (ET), Rajan said:

The government can decide whether it wants to put on the seat belt or not. Wearing a seat belt helps prevent the unfortunate eventuality.

Raghuram Rajan to <i>ET </i>

Rajan was referring to the recent spat between the central bank and the government, regarding rumours related to the imposition of Section 7 of the RBI Act, which would significantly weaken the bank’s autonomy. Added to this, the Act has never been imposed by any central government of India before.

The government’s interest in imposing the act, reportedly stems from the fact that due to the scarcity of cash in the market, it wishes to take a loan from the central bank which tightens the noose around 'weak' government banks.

‘RBI Should Play Like Dravid'

Speaking about the role of the bank in respect to the government, Rajan also likened the bank to former Indian team captain, Rahul Dravid, saying that like Dravid, it should play the role of “wise counsel”, the ET report added.

The role of the central bank is to be the wise counsel, like Dravid, not to make operational decisions and certainly not be loud like Navjot Sidhu.

Raghuram Rajan to <i>ET </i>

Adding to this, the former RBI governor said that while the bank’s role has always been to maintain “financial stability”, the government’s agenda would be to “push growth”.

Referring to the tussle, Rajan said that while it is possible for the RBI and the government to disagree on matters, it is important that they both respect each other’s authority.

‘Imposition of Section 7 is a Cause of Worry’

On being asked about his reaction to the possible imposition of Section 7 of the RBI Act, Rajan said that if it were to happen, it would be a “cause of worry” and that relations between the two parties would become extremely “precarious”.

Reiterating his point about mutual respect between both the government and the bank, he said that while the RBI is an agency of the government, the latter should understand it has been entrusted with a particular task- to maintain financial stability for one- and to let it do so without interference, the report added.

At the same time, he also said that the RBI should be respectful of the “government’s territory”.

Ongoing dialogue must be based on respect. They have to be watchful of each other’s territories, when encroached it’s problematic. Hope respect for RBI’s territory gets re-established.&nbsp;

Raghuram Rajan to <i>ET </i>

‘RBI Can’t Pay More Than Profits (as Dividend Accounting) to Centre’

Explaining the Centre’s rights on RBI dividend, Rajan said that the value of RBI equity is the Centre’s asset, considering that the bank is a subsidiary of the government, the report stated.

Speaking about the advantages of having RBI as a separately capitalized entity, he said:

India has a BAA rating and can borrow only at that rate, RBI equity has AAA rating. Helps to have one entity in the market that is well-capitalised on a rainy day. Having RBI as a separately capitalized entity gives you a vehicle that can make credible promised in global markets. RBI’s separately capitalised entity has AAA rating, has credibility like swap pact of 2013.&nbsp;

Raghuram Rajan to <i>ET</i>

He added that due to the rapid depreciation of the rupee, the RBI’s capital equity has gone up.

However, he said, that the bank should not give more than the profit as dividend accounting to the government, advice which was echoed by accountants, as its role to ensure credit worthiness and printing money has made it “tough to give away dividend”, the report added. He also said that RBI giving “extraordinary dividend” to the government would lead to an “inflationary situation”.

“If dividend is transferred, then an equal amount of the government bond has to be sold to suck out liquidity to avoid inflation. There are no free lunches with dividends, there is no Rs 3 lakh crore to give to the government. Giving dividend and then sucking out liquidity will not change the borrowing programme,” he said.

Also emphasising on the important role of the RBI board in managing the standoff between the bank and the government, he said: “The role of the RBI board is not operational but to coach. It is supposed to bridge differences, reduce noise. India can’t have a breakdown in dialogue between Central Bank and government,” the report added.

(With inputs from The Economic Times)