Rajan Argues for Independent Indian Central Bank in Final Speech

  • Multiple layers of scrutiny hampers RBI decision making: Rajan
  • Govt framework reduces RBI space for difference of view

India must have a strong and independent central bank to ensure macroeconomic stability in the world’s fastest-growing major economy, Reserve Bank of India Governor Raghuram Rajan said a day before his term ends.

“The central banks should be independent and should be able to say no to seemingly attractive proposals,” Rajan said in a speech in New Delhi on Saturday. “Multiple layers of scrutiny, especially by entities that do not have the technical understanding, will only hamper decision making.”

Rajan is set to return to academia after steering the biggest overhaul yet of the 81-year-old central bank, including a switch to inflation-targeting under a monetary policy committee that’s due to be set up in the weeks ahead. He also pressured lenders to reveal the true scale of soured loans, lifting the lid on a $120 billion mountain of bad debt that banks are struggling to reduce.

Apart from shaking up the central bank, Rajan was outspoken on social issues such as corruption and the need for religious tolerance, angering some members of Prime Minister Narendra Modi’s ruling party.

The government framework that RBI operates on reduces the space for differences, and it was important that the constitutional authorities clearly outlined the central bank’s responsibilities, Rajan said.

Rajan’s successor Urjit Patel, currently a deputy governor at the monetary authority, inherits accelerating inflation and slowing economic growth. Gross domestic product expanded 7.1 percent in the April-June quarter from a year earlier, the fastest among major economies but the slowest pace for India since early 2015.

“In a poor country like India where so many people live at the margin, the role of the central bank was to ensure that growth did not exceed the country’s potential, adopting prudential policies that reduce the risk, and building sufficient buffers that the country was protected against shocks,” Rajan said.

Consumer-price inflation breached 6 percent in July, exceeding Rajan’s 5 percent target for March. He left the benchmark repurchase rate at a five-year low of 6.5 percent in August. 

There’ll be room to cut borrowing costs only if inflation is projected to fall, the monetary authority said in an annual report on Aug. 29. The next scheduled policy review is in early October.

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