RBI is the seat belt in the car that the govt shouldn’t ignore to avoid mishaps: Raghuram Rajan

New Delhi: As the Reserve Bank of India (RBI) and the government are locked in a stalemate situation, former RBI Governor Raghuram Rajan pitched for the institutional autonomy of the central bank, saying that the RBI was like a seat belt in a car, without which accidents could happen.

"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.

'RBI can say no to the govt'

Rajan also said categorically that the RBI had the liberty to say no if the government pushed it to be lenient. Ahead of the November 19 meeting of the RBI Board, he said the objective of the board was to protect the institution and not serve others' interests.

The relationship between the government and the RBI has been fraught with tension historically because the government wants to focus on improving growth and the RBI has to step in and call out policies if they threaten to disturb long-term financial stability. And therefore, Rajan said, "So the government will push, will try and get the RBI to be more lenient," 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."

On Section 7 of the RBI Act

On the issue of the government citing Section 7 of the RBI Act that gave the government powers to issue directions to the RBI governor on issues of public interest, Rajan said it would be best if each side respected each other's motivation and thoughts.

"Once you (government) have appointed these deputy governors and governor, you have to listen to them because that is what you have appointed them for, they are your safety belt," he said.

The RBI board

Speaking about the role of the RBI board, the former RBI Governor said its task historically had not been to take operational decisions, but focus on broader strategy as well as good governance. "So, they are there to ensure that the government's money is well spent in the RBI, for example, the RBI doesn't pay itself inordinate salaries and so on but also to serve as a sounding board, which is why we have people from different walks of society, very eminent people."

"So, my sense is that the objective of the board is to protect the institution, not to serve others' interest; it is to protect the health of the institution but also to provide wide, sensible advice. The aim of the board is to be Rahul Dravid — sensible, thoughtful and not, with due respect, Navjot Sidhu," he said.