Raghuram Rajan backs RBI autonomy; says play sensibly like Dravid

Former Reserve Bank of India governor Raghuram Rajan defended the central bank's call for greater autonomy from the government, saying ultimately the nation stands to benefit from an independent and robust RBI.

“The aim of the RBI board should be to protect the institution, provide sensible advice and not serve interests of the others. The aim of the board is to be a Rahul Dravid, sensible, thoughtful and not, with due respect, Navjot Singh Sidhu,” said Rajan in an interview to CNBC TV18.

"As far as possible, it is in the interest of the country that we respect the institutional autonomy of the Reserve Bank, as well as the traditions," Rajan, who was succeeded by current governor Urijit Patel in September 2016, said.

“Once you have appointed a governor or deputy governor, you should listen to them,” pointed out Rajan.

That speech by RBI deputy governor Viral Acharya roiled markets and prompted the government to issue a statement in support of the central bank’s autonomy. Many viewed Acharya’s comments as a sign that the RBI was pushing back hard against government pressure to relax its policies and reduce its powers ahead of a general election due by May.

The rift between the government and RBI can be resolved if both sides respect each other’s intent, said Rajan in the interview.

Rajan, who is a finance professor at the Chicago Booth School of Business in the US, commended Acharya for warning of risks stemming from government meddling of central bank affairs. But he also said the RBI could inject liquidity to ease any cash crunch at financial institutions, indirectly supporting the government’s call for a liquidity window for Non-Banking Financial Companies.

NBFCs, loosely known as shadow banks, are seeing a massive cash crunch after a major infrastructure funding company defaulted on a series of debt obligations in September triggering a sell-off in other financial institutions in the sector on worries over contagion risks.

But he also said the RBI could inject liquidity to ease any cash crunch at financial institutions, indirectly supporting the government's call for a liquidity window for NBFCs.

“If it's a liquidity problem, the central bank can flood the market with liquidity or give the liquidity to specific private entities that are healthy, and are willing to lend to these other entities that are in trouble,” said Rajan.