Rajan backs Urjit on differences with Centre, says RBI board role worrisome, shouldn’t intervene in ops
MUMBAI: Embattled RBI governor Urjit Patel’s predecessor Raghuram Rajan has come out in support of professionals leading the central bank, stating the regulator’s board should only ensure governance, not intervene in operational decisions.
“The RBI’s board is not an operational board. It is not led by professional supervisors or central bankers. These are all people from different walks of life whose main role is to play the wise people to advise, to counsel, to play a Rahul Dravid, to coach in some sense but not to make operational decisions and certainly not be loud like Navjot Sidhu,” Rajan said in an interview.
Pointing out that earlier members included those with diverse backgrounds such as cooperative organiser Ela Bhatt and nuclear physicist Anil Kakodkar, Rajan said they limited their role to giving direction. “I think that is the role of the board rather than to intervene in operational decisions and to substitute their judgment for the judgment of the professionals who actually manage the RBI,” he said.
Rajan’s statement comes at a time when there is friction between the top rung of the central bank and its board, which is playing a more active role. The board’s behaviour changed after the government brought in new members, including Swadeshi ideologue S Gurumurthy, and removed veteran banker Nachiket Mor.
RBI is seatbelt for govt, useful in a crash: Rajan
Rajan said it is not practically possible for the government to meet its fiscal targets by getting the RBI to transfer a larger amount from its reserves. “The RBI is not like an ordinary PSU, it actually prints the money which means that if I pay an extraordinary dividend, let’s say Rs 3 lakh crore, it essentially means Rs 3 lakh crore more of money is there in the capital markets and that is going to be inflationary,” he said. He added that releasing Rs 3 lakh crore by dividend would require the RBI to sell bonds worth Rs 3 lakh crore to prevent inflation, leaving the government in the same position as before.
Describing the change in the role of the board as most worrisome, Rajan said he hoped that people “back off from the cliff edge” and take the right lessons. “Both sides have to listen to each other, but there has to also be a respect of each one’s turf.
What to my mind is most worrisome is the change in the role played by the RBI’s board in all this,” Rajan said.
According to him, a good analogy is the central bank is a seatbelt for the government, which is the driver. “The driver can decide whether to put on the seatbelt or not. The driver may not put on the seatbelt, but the seatbelt is useful in times of a crash,” he said. The former governor, who has returned to his old job at the University of Chicago’s Booth School of Business, added, “There are still very good people on those boards and I would hope that they would come together to bridge these differences and reduce some of the noise that is coming. I do not think India should have a breakdown in dialogue between the central bank and the government. I do not think it needs to happen. I do not think, if wiser minds prevail, it will happen.”
Rajan is the only former central banker to openly state that the board should stick to its advisory job. He also sided with the RBI on the issue of applying prompt corrective action (PCA), stating that it should be left to the RBI’s professional judgment. On the demand for more funding for MSMEs, he said such clamour was there across the world because it is difficult to lend to this sector. According to him, the solution lay in formalising the sector and simply opening the tap would lead to more NPAs.
On liquidity support for finance companies, Rajan’s views were consistent with that of the RBI. “Any kind of intervention should come after the entities that are in difficulty have taken their own steps to bolster their balance sheets. If your view is your commercial paper is coming six months from now and therefore you are worried about rollover, should you not be raising equity now even if prices are depressed to back your balance sheet?” he said.
Earlier speaking to another channel, Rajan said the list of delinquent borrowers he sent to the government comprised frauds and not wilful defaulters. He added that he was not aware of the progress made on the issue.