Raghuram Rajan says Govt must protect central bank's independence

According to Raghuram Rajan, the criticism that RBI killed growth with high rates was at odds with “received wisdom” of India being fastest-growing and  he further urged the government to look beyond ‘motivated criticism’ to protect the central bank’s autonomy.

The outgoing Reserve Bank chief also rejected the argument that inflation has come down largely because of “good luck” stemming from low oil prices and not because of RBI’s monetary policy measures, saying a significant part of decline in global prices has not been passed on domestically as the government has hiked excise on petrol and diesel.

Rajan, who has decided against a second term amid a spate of attacks including some of personal nature, rejected the criticism that he has kept the monetary policy “too tight” and blamed the slowdown in credit growth largely to stress in the public sector banks, stemming from “past mistakes in lending”.

He also appeared to blame “over-leveraged promoters” for voices against the clean-up at banks and said “some public sector bank CEOs with a short remaining tenure would prefer not taking stern action and recognizing NPAs” as they might “prefer transferring any problems to their successor”.

He also said that investors in bank shares do not welcome disclosures of loan losses initially, while “depositors, knowing the government stands fully behind PSU banks, are rightly unperturbed by the quality of bank balance sheets”. Rajan said high inflation has “pernicious effects” on the weaker sections and wondered why there was so “little anxiety” over the price-rise scenario.

“Without any political push back as inflation rises, it is necessary to build institutions to ensure macroeconomic stability...perhaps this is why successive governments, in their wisdom, have given the RBI a measure of independence,” said Rajan, who will return to academics when his three-year term ends on September 4.

Hitting back at the critics who have blamed him for keeping rates too high and thus killing demand and growth while failing to even control inflation, Rajan said, “Critics offer two contradictory arguments on inflation”. “On the one hand, they argue that we have killed demand and growth through high rates though this itself seems at odds with the received wisdom that we are the fastest growing large economy in the world.

“On the other, they argue that our policy has had little effect on curbing inflation, that disinflation has been a result of the fall in oil and other commodity prices.”Rejecting these arguments, the former IMF Chief Economist said in a lecture here that the disinflation process started in late 2013, long before oil prices collapsed.

“Moreover, a significant part of the fall in oil prices globally has not been passed on domestically, as the government has hiked excise on petrol and diesel, and refinery margins have also waxed and waned.

“For instance, even as the price of the Indian crude basket fell 72 per cent between August 2014 and Jan 2016, the pump price of petrol fell only 17 per cent. Therefore, while I do want to acknowledge the benign global price environment in bringing down inflation, it is not the entire story.”He further said the criticism of the central bank with arguments unsupported by evidence happens outside India too.

Giving examples of the UK and US among other places, Rajan said, “Criticism comes with the territory, and central banks need to make the case for their policies. “At the same time, it is important that governments around the world look beyond sometimes uninformed and motivated public criticism and protect the independence of their central bank to act. That is essential for stable sustainable growth.”