Mumbai: India needs to ensure that the independence of the Reserve Bank of India (RBI) is maintained and that the norms governing the central bank do not leave any space for ambiguity, governor Raghuram Rajan said at his last public speech on Saturday.

Talking about government agencies always trying to ask for oversight of various aspects of the banking sector regulator’s activities, Rajan said “Multiple layers of scrutiny, especially by entities that do not have the technical understanding, will only hamper decision-making."

Instead, the government-appointed RBI Board, which includes former government officials as well as government appointees, should continue to play its key oversight role, he added. Presently, all important RBI decisions including budgets, licenses, regulation, and supervision are either approved by the board of the central bank or one of its sub-committees.

“Vacancies in the RBI board, which have remained unfilled for many months now, should be filled quickly so that the full expertise and oversight of the board can be utilized," Rajan said.

To explain better his point about central bank independence, Rajan brought attention to the beginning of his tenure as the RBI governor in September 2013, where he had to take tough calls around stabilising the rupee and bringing back foreign investor confidence in India. The RBI chief chose to go ahead with implementing foreign currency non-resident (FCNR-B) deposits route for this, terming it as a measured risk. FCNR (B) brought in $26 billion of foreign currency deposits into Indian banks, which allowed for stabilising the currency and is now up for repayment.

“We still must explain to the best of our ability but we also need to create a structure where the public trusts the central bank to do the right thing. This then is why we need a trusted independent central bank," Rajan said.

It is also important that the Parliament understand what the central bank is doing, he said. To better this, the governor and deputy governors of the RBI have initiated a six-monthly interaction with the parliamentary standing committee on finance, where the governor reports on the activities of the Reserve Bank, and the committee offers its views and concerns.

Also read: Looking back at the Raghuram Rajan years

Talking about clarity of norms around governance of the regulator, Rajan said that there are some areas that are hazy. Expanding on this, the central bank chief said that with an inflation focused framework, the RBI’s ability to be accommodative depends on fiscal prudence from the centre and states. If the constitutional authorities outline a framework for the responsibilities of the RBI, it can take actions consistent with those responsibilities and be held to outcomes, Rajan added.

“How much should the RBI warn on fiscal profligacy, including the building up of contingent liabilities, and when should such warning be seen as interfering in the legitimate decisions of the elected representatives of the people? This is an area where clarity would be useful," he said.

According to Rajan, frameworks reduce the space for differences, which is essential for the RBI’s efficient functioning.

Discussing the issues around the rank of the RBI governor, Rajan said that in the interest of the nation, a central bank chief must be allowed room to make needed decisions with explanations provided only to the prime minister and the finance minister, as the practice continues today.

“It is dangerous to have a de facto powerful position with low de jure status... In the interests of macroeconomic stability, none of this should be changed, though if these issues are ever revisited, there may be some virtue in explicitly setting the Governor’s rank commensurate with her position as the most important technocrat in charge of economic policy in the country," Rajan said.

About his time as the RBI governor, Rajan said that he did the best job he could without fear or favour, adding that this would be his last public speech in India for a while.

“It has been an honour to work for the country and especially to talk to people like you, its future," Rajan added.

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