BackProtect autonomy of central banks for stable growth: Raghuram Rajan
Reserve Bank of India (RBI) governor Raghuram Rajan says criticism of the central bank's inflation record is not backed by sound evidence
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New Delhi: Defending the Reserve Bank of India’s record on inflation management and bank balance sheet clean-up, outgoing governor Raghuram Rajan said that governments should protect the independence of central banks in the interest of stable and sustainable economic growth.
“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," said Rajan in his speech at the 10th Statistics Day conference on Tuesday, a copy of which was published on the website of the central bank.
His comments come a day after his predecessor D. Subbarao stressed the importance of the RBI’s autonomy. Subbarao listed instances of tension between RBI and the government in his memoir Who moved my interest rate.
Rajan himself has been attacked by members of the ruling Bharatiya Janata Party (BJP) for being slow in cutting interest rates. Government support for Rajan was seen as lukewarm, fanning speculation that his departure was motivated by such criticism.
Last month, Rajan said that he does not wish to serve a second term at the helm of the central bank and will return to academics after his tenure ends in September.
In his latest defence of RBI’s record, the former chief economist of the International Monetary Fund (IMF) said that criticism of the RBI’s inflation management is not backed by sound evidence.
Citing data, Rajan said that although statistics vindicate the RBI’s position on inflation, there is very little commentary about inflation and its effects on the poor in public discourse.
“With no powerful and vocal political constituency getting agitated about generalized inflation so long as it is only moderately high, opponents of disinflationary policies are free to frame the debate as they wish. The persuasive way is to claim that interest rates are hurting growth," said Rajan.
Refuting the claims of high interest rates made by borrowers, Rajan said that the rates may be steep because of the premium added for default risk, tenure risk and compensation of the lender.
Rajan also said that the argument that the sharp fall of global commodity prices was the only factor in bringing down inflation is misplaced.
He pointed out the irony of arguments that the central bank has stifled growth at a time when India is among the fastest growing economies of the world. He also stated that RBI brings down inflation by curbing inflationary expectations among the public and not by curbing demand alone.
“Interestingly, the clamour builds up whenever year-on-year inflation is low relative to the policy rate, no matter whether low year-on-year inflation is because of mechanical base effects, and regardless of whether inflation is projected to go up in the future. No serious central bank determines policy on such a basis, but it sometimes is the focal point for the media debate here," he said.
The governor also said the central bank should continue with the bank balance sheet clean-up process to ensure a healthier banking system. With the help of charts, Rajan explained that the weakening balance sheets due to rising bad loans were the main reason behind slowing credit offtake rather than the high interest rates.
Citing bankers who were reluctant in the beginning and are now on board to fix the toxic loans in their books, Rajan said that some have gone beyond what was expected by the regulator.
In his three-year term that ends in September, Rajan has brought down inflation from double digits to a manageable 5-6%.
Under Rajan, RBI adopted retail inflation as the main policy anchor, floated a new monetary policy framework wherein the interest rate decision would be committee-based and undertook a massive clean-up of the balance sheets of public sector banks.
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