Govt must protect apex bank's freedom: Rajan

Outgoing Reserve Bank of India Governor Raghuram Rajan has said that the government should look to protect the independence of the central bank.

“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,” Rajan said at the 10th Statistics Day Conference 2016, according to a speech published on the RBI website.

 Rajan has been facing flak for keeping interest rates high during his tenure by various politicians, especially BJP member of Parliament Subramanian Swamy. RBI has cut interest rates by 150 basis points since January 2015.

 Rajan also said that criticisms of the central banks are not just restricted to India. “Criticism of the central bank using arguments unsupported by evidence is not just an Indian phenomenon.”

“The Bank of England was criticised for laying out the economic costs of Brexit, the European Central Bank has been criticised for doing too much to restore health to troubled peripheral economy financial sectors, and the Fed is under fire for departing from the Taylor Rule.
Criticism comes with the territory, and central banks need to make the case for their policies.” Rajan also defended RBI’s decision to clean up balance sheets of banks through various moves.

“After an initial reluctance, banks have entered the spirit of the cleanup and some have gone beyond what was demanded of them. The stock market, after reacting negatively initially early this year, has been more supportive of public sector bank stock prices, probably reflecting the belief  theat the cleanup is good over the medium term,” Rajan said.
DH News Service

 Promoters are selling assets and paying up, and new asset reconstruction companies are being started to buy assets. To restore bank balance sheets to health, it is important this process be taken to its logical conclusion, Rajan added.

 Stating that a drop in inflation was only because of low energy prices, Rajan also defended the moves by the central bank. “There is a belief in some quarters that the Reserve Bank has hurt economic growth by keeping interest rates and borrowing costs too high and that those high rates have reduced credit and spending but had little effect on inflation. Inflation has come down only because of good luck stemming from low energy prices,” Rajan said.

 Furthermore, the RBI has compounded the growth slowdown by urging banks to clean up their balance sheets. The RBI, of course, stands by its policies, Rajan added.