Former Reserve Bank of India (RBI) Governor Raghuram Rajan defended the central bank’s call for greater autonomy from the government. He said that ultimately the nation will benefit from an independent and robust RBI.
“As far as possible, it is in the interest of the country that we respect the institutional autonomy of the RBI, as well as the traditions,” Rajan said. He was succeeded by current governor Urjit Patel in September 2016.
“RBI is something like a seat belt. As a driver, the driver being the government, it has the possibility of not putting on a seat belt. But of course, if you do not put on your seat belt you get into an accident and the accident can be quite severe.” he told CNBC TV18.
RBI and government have not been on the same page for months. Tensions between the two sides came to the forefront last month. RBI Deputy Governor Viral Acharya had said failure to defend central bank’s independence would “incur the wrath of the financial markets“.
Rajan said the ongoing rift between the union finance ministry and the RBI can be resolved if both sides respect each other’s intent. Rajan said the central banks need to examine the liquidity problem of non-banking finance companies (NBFCs). He said that RBI need to solve the issue by putting liquidity in the market.
He added that the government can contemplate a bailout option if the liquidity problem persists in the NBFC companies. The country is growing at a faster pace than most other countries, Rajan said, raising concerns on the current account deficit (CAD) blowing up.
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 European Central Bank (ECB) is also going to stop its quantitative easing by the end of this year, “the monetary policy is expected to tighten in the future”, he added.