Former RBI governor Raghuram Rajan on Tuesday said the central bank is like a seat belt in a car, without which "severe" accidents can happen.
Rajan's statement comes amid prevailing tensions between the Reserve Bank and the Finance Ministry."The 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.
Rajan also pitched for respecting the institutional autonomy of the RBI, and said the central bank has the liberty to say no if the government pushes it to be lenient.
"So, the government will push, will try and get the RBI to be more lenient," he said, adding the central bank would examine them in close details and in reference to risks to financial stability. "We (RBI) have responsibility for financial stability and therefore we have an authority to say no," he said.
The RBI led by Governor Urjit Patel and the government have not been on the same page on different issues for some months now. The disagreements came out in open when RBI Deputy Governor Viral Acharya in a hard-hitting speech said failure to defence central bank's independence would "incur the wrath of the financial markets".
It later emerged that the government had used a never-before-used provision of the law to seek resolution of issues, including the easing of NPA norms, so that banks can kick-start lending and support growth, and transferring more dividend to boost liquidity -- issues which the central bank thinks cannot be relented.
"Of course the RBI doesn't say no out of petulance. It says it because it has examined the situation and believes that this take implies too much financial instability," Rajan said. "I think that relationship has gone on for a long and the fact that the RBI says no is not new. The government can keep asking and say please consider this, please consider that but at some point, it says okay I respect your decision, you are the financial stability regulator and I back off".
"Once you have appointed these Deputy Governors and Governor, you have to listen to them because that is what you have appointment them for, they are your safety belt," he said.
On the issue of the government citing Section 7 of the RBI Act that gives it powers to issue directions to RBI Governor on issues of public interest, Rajan said it would be best if each side respected each other's motivation and thoughts.