Pitching for respecting the institutional autonomy of the RBI, he said the central bank has the liberty to say no if the government pushes it to be lenient.
Ahead of the November 19 meeting of RBI Board, he said the objective of the board is to protect the institution and not serve others’ interests.
“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.
Historically, the relationship between the RBI and the government has been precisely this — the government wants to focus on improving growth and it does all it can within the limits set by the RBI which are based on financial stability.
“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.
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.
“And ultimately the RBI after listening to the government and hearing what the government’s issues were provided the best professional answer it could and historically it has done that. I have no doubt it is doing that today. It has a responsibility to fulfill to the nation. It has to listen of course but at the end of it, after listening it has to make a decision because ultimately it has that responsibility,” he said.