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Government should preserve the autonomy and credibility of RBI, says Raghuram Rajan

Government should preserve the autonomy and credibility of RBI, says Raghuram Rajan

Government should preserve the autonomy and credibility of RBI, says Raghuram Rajan
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By Latha Venkatesh   | Shereen Bhan  Dec 10, 2018 9:57:18 PM IST (Updated)

Raghuram Govind Rajan, economist and 23rd governor of the Reserve Bank of India (RBI), is one of the few economists who predicated central bankers about the 2008 financial crisis. Rajan, 55, was the chief economist and director of research at the International Monetary Fund (IMF), is also a distinguished service professor of finance at the University of Chicago's Booth School.

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Reacting to Urjit Patel's decision to resign as  RBI governor, Rajan said his resignation a statement of dissent and cautioned government to preserve the autonomy and credibility of the central bank.
In an exclusive interview to CNBC-TV18, Rajan said this is probably only the second resignation in its history maybe the first explicit resignation and therefore, we have to look at the circumstances that lead to it.
Watch the video here.
You have been fairly vociferous in your criticism in a manner in which matters between the government and the RBI have been handled and now we have got Urjit Patel tendering in his resignation. The prime minister and the finance minister tweeted that they appreciate his work and wishing him luck but what does this mean for RBI. What does it mean for India and the economy?
Rajan: I do think this is a serious issue, it needs to be dealt with carefully. The government has to ask what lead to this resignation. Resignations are not frequent at the RBI. This is probably only the second resignation in its history maybe the first explicit resignation and therefore we have to look at the circumstances that lead to it. It's a statement of dissent and therefore, the government has to be very careful in dealing with it such as the autonomy of the institution as well as its credibility is preserved.
You say it is a statement of dissent but the governor's own statement say nothing of that sort. It says I am resigning due to personal reasons. If you believe that, a statement of dissent would it not have been then accurate for the outgoing governor to have said so?
Rajan: In all these cases you have to read between the lines. It may well be that health is involved but we also have to look at the circumstances in which this decision has been made and ask what prompted it. I think it is useful to go over the kind of dialogue that has taken place over the last few weeks and ask if there is anything that could have prompted such a statement.
Will it be very difficult to get credibility for the successor because it may be seen as the government has picked someone who is willing to toe the line?
I think you are prejudging a lot of events, we do not have a new appointment yet. We have to see what the government does both on the current set of controversies between the RBI and the centre but also in terms of the process of appointment of the new governor and who the new governor might be. It is a long way there, I think we should not prejudge what might happen but it is extremely important at this point for the government to take due note of what has happened, take it very seriously and act appropriately to preserve the credibility of the institution.
What do you think could have been the proximate reason? Is it that Section 7 was threatened to be used? You know the events that have led to this resignation. Is it the political appointments to the board, is it the empowering the board to such an extent that the RBI is being made to toe the line? As a person who knows the institution which comes as a shock to you, which do you think was the wrong way to go?
Rajan: I do not want to speculate. All I will say is that the act of resignation is really the ultimate weapon in a government appointee's portfolio and they don't exercise it lightly. So, to that extent, we must look at this decision and understand why Urjit Patel who was appointed by this government essentially exercised that particular option. Now as you said earlier, it may well be because of health reasons but something coming at this juncture given that Urjit Patel was hale and hearty at the monetary policy conference a few days ago, would suggest there is more to it than just this statement. I think the government is well-advised to look at the details and understand why it happened and act appropriately.
Can the RBI be managed for some time with the deputy governor or do you think it is extremely important to find a replacement very quickly?
Rajan: There have been circumstances in the past where interim people have held the position. I do not think that it is something that needs to be done tomorrow. I think the government has to be deliberate about this because it involves the credibility of one of India's most important institutions. So, treading carefully is extremely important.
I do not expect you to speculate on what could have been the precipitating factors behind the resignation but I will ask you this because this is all been documented publically, of the issues where there was variance between the government and the RBI, to your mind what would be the most serious of those issues? Would it be the use of capital reserves of the RBI, is it this business of relaxation given to banks that find themselves under the prompt corrective action (PCA), a line of credit to NBFCs, of the issues where there has been variance, what would concern you the most?
Rajan: Let me not speculate. I don't really know and I should not suggest when I don't know.
I am not asking you to speculate but which looks like the most serious issue to you as a person who knows the institution well. Is it Section 7 that looks serious to you, is its appointments to the board that looks serious to you? As someone who wishes well for the institution, which according to you threatens it most?
Rajan: I do not know what was in the mind of Urjit Patel as well as deputy governor Viral Acharya who spoke earlier about some of the issues between the government and the RBI. I think it would be well-advised to look at the circumstances that have led up to this resignation and there has been a fair amount of back and forth and see to what was it that Urjit Patel felt more strongly about.
I think the institution has a long record of cooperating when necessary but also standing firm where it is not in the interest of the nation. So, to that extent we must ask what was it that prompted Urjit Patel to believe that he could no longer continue, so, I would think that is worth looking at.
Can there be a charge that this time around the institution did not cooperate, that could well be the government's stance, that unlike previous regimes this one did not?
Rajan: I do not want to go into the details because I am not familiar with them. I just think that this is an important issue that needs to be examined.
Per se do you think that the investment community will be extremely disturbed by this?
Rajan: That is something for the investment community to decide. It is hard to speculate, we will know tomorrow morning when the markets open.
Do you think the next best thing the government should do is to get another governor immediately? What should be on the government's priority list now?
Rajan: I have said the government can take its time. The main issue is to go carefully and deliberately over what has happened and figure out how to ensure the credibility of the institution going forward. So, I think those are all matters that the government can and should and will hopefully pay attention to.
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