Raghuram Rajan, the former Reserve Bank of India (RBI) governor, on Tuesday said the central bank is like a seat belt, without it you can get into an accident.
Speaking exclusively to CNBC-TV18, Rajan said the central bank should be protected as a national institution and the unhealthy disagreements between the union finance ministry and the RBI should not escalate further.
"Once you have appointed a governor or deputy governor, you should listen to them," Rajan said, adding that he commends Viral Acharya for warning in support of RBI's autonomy.
Rajan said the ongoing rift between the union finance ministry and the RBI can be resolved if both sides respect each other's intent.
The central bank has the liberty to say no if the government pushes the RBI to be lenient, Rajan said, "Government should make its case to the bank and let the RBI decide."
The RBI board's objective is to protect the institute and not serve other interests, Rajan said, adding, "Running over a central bank has not been good for any economy."
Rajan said the central banks need to examine the liquidity problem of non-banking finance companies (NBFCs) much closer and solve the issue by putting liquidity in the market.
NBFCs account for 17-18 percent of assets and currently, the problem is manageable, the former governor said.
He added that the government can contemplate a bailout option if the liquidity problem persists in the NBFC companies.
"In general, central banks avoid lending to direct entities. Lending to direct entities involves credit evaluation. Central banks are not in fiscal function of bailing out entities," Rajan said.
The former governor said India is in a much better situation in terms of inflation and the government and the RBI should be duly credited for keeping the inflation low.
The country is growing at a faster pace than most other countries, Rajan said, raising concerns on the current account deficit (CAD) blowing up.
On central banks
The former chief economist at the International Monetary Fund said that across the world, the monetary policy is expected to tighten in the future.
On the US Federal Reserves rate hike, Rajan said the US has the benefit of a substantial fiscal stimulus, adding that the American job data will determine if the Fed will continue to hike its rates.
The former RBI governor expects the US Fed to hike its rates only once this year and thrice in the next year. However, the strong US growth may not last as the Fed continues to tighten its rates.
The EU central bank is also going to stop its quantitative easing by the end of this year, he added.