The role of the RBI board is to be the wise counsel, to play a Rahul Dravid, not to make operational decisions and certainly not be loud like Navjot Sidhu,former governor, RBI tellsofEdited excerpts:Let us back off from the current controversy and think about what the relation between the Govt and Central Bank is. Dr Viral Acharya talked about T-20 and the Test match. A good analogy of the Central Bank is - it’s a seat belt for the Govt, which is a driver. The driver may not put on the seatbelt but the seatbelt is useful in times of a crash.Now think about the Central Bank’s thinking about the crash, “I want to protect financial stability because I do not want that to be a terrible event.” And the driver is thinking about the process of normal driving and says I want to be relatively free of constraint. But when they talk to each other they realize that there is some value in putting on that seat belt, because it prevents unfortunate eventuality.The historic relationship between the Govt and the RBI has been based on the fact that Govt naturally and correctly thinks about pushing growth and for that it wants maximum freedom given to all the entities responsible for growth. But the RBI focuses on financial stability and says here is the amount of growth that I can allow without impeaching on financial stability. And they work with each other on that basis. The Govt always pushes letters on the table saying relax this etc. They know we will look at the letter carefully and take a view. But that view would be how we maximise growth while protecting financial stability. Ultimately, the responsibility is with the RBI for financial stability and if we failed on it we would be held to task. So given that responsibility we have the authority to say no. Let me remind you of that quote in Dr. Subbarao's book where talked about the relationship between Dr. Reddy and Mr. Chidambaram based on a phone call. Where Dr. Reddy's side he was hearing and Dr. Reddy said No, No, No, No, and Yes eventually. When Dr. Subbarao asked what were you saying No to and Dr. Reddy said he asked me to relax this, relax that and I kept saying No. Ultimately he asked can you hear me and I said Yes and that's how the call ended. That anecdote is really about the relationship between the relationship of Reserve Bank and the government. Govt appoints the governor, appoints the deputies but ultimately goes by the views knowing these are professionals. They are not doing it for political reasons, or for their own self-inetrest, they are doing it because they have a taken a view on the ultimate stability of the country.No, I think it is possible to disagree but still be respectful to each other's territory. Certainly in my relationships there were many disagreements but I hope there was an understanding that this was not because of bloody-mindedness but because there was a worry and they knew when the RBI said yes, it meant we were taking responsibility for the financial stability consequences. We always tried to maximise the potential for growth while keeping that financial stability in concern. Of course the RBI essentially in some ways the agency of the government and of course it has to respect the overall concerns and objectives of the government. But the government has entrusted it with the responsibility for financial stability and therefore it has to, as a good responsible entity carry out that responsibility. And sometimes, as I said, the seatbelt constraints but that seatbelt constraints because you put it on and you put it on knowing that it will prevent you from an accident.Section 7 hasn't been invoked so that's the good news and I do believe that when the relation gets so precarious that it has to be invoked then we have to be very worried. That said, I think the dialogue between the RBI and Govt is always an ongoing one. There are always sort of points of you being expressed and sometimes there are sort of disagreements. But ultimately it works based on respect. You have to know why the other guy is doing what he is doing and ultimately at the end of the day you have to part maybe not as friends but having respect for each other's territory. It's when you encroach each other's territory that it becomes problematic and I would hope that respect gets re-established.I would rather hope that people take the right lesson from what has happened so far and back off from the cliff edge. I think both sides have to listen to each other, but I think there also has to be a respect of each one’s turf. What to my mind is most worrisome is the change in the role played by RBI’s board in all this. The RBI board is not an operational board. It’s not led by professional supervisors and central bankers. These are all people from different walks in life whose main role is to play the wise people, to advise, to counsel. To play a Rahul Dravid, to coach in some sense. But not to make operational decisions. Certainly not be loud like Siddhu. What I am very worried about is the change in tenor. They are supposed to be the wise people who bridge differences rather than force greater ones. We’ve had excellent people on those boards. There are still very good people on the board and I hope that they would come together to bridge these differences and reduce some of the noise that is coming. I don’t think India should have a breakdown in the dialogue between the central bank and the govt. I don’t think it needs to happen I don’t think if wiser minds prevail, it will happen.I don’t want to comment on specific personalities but really the govt appoints people on board primarily to ensure that the governance of the institution is in the direction that the country desires. To check that they are not paying themselves inordinate salaries but also to give them a guidance about what people from different walks in life think. I think that is the role of the board rather than to intervene in operational decisions and to substitute their judgment for the judgment of the professionals who actually manage the RBI. I think we need to do this separation because clearly in the recent past, we are transcending what should be the appropriate role of the board and I hope that there is a dialogue between all the parties concerned to reset what should be happening.I think there are 2 separate issues which are being confounded. One is the issue of fraud, not necessarily the same wilful defaulter. Wilful defaulter is somebody who doesn’t want to pay but who hasn’t run away with the money. On the issue of frauds the full arm of the force of the law should be employed to bring these frauds to book and to essentially show that the Indian law enforcement structure is capable of doing that. That’s certainly is work in progress. Separately there is the issue of number of business people who the banks believe are not paying them when they have the ability to pay and eventually through a quasi-judicial process declare wilful defaulters. I am not well versed enough legally to understand why those names cannot be made public after they have been through a judicial process but this is something that belongs to the legal realm rather than something I have expertise inSo, Look, I don't want to get into the specifics of the case because there is more information that I have on the specific frailties of the NBFCs. But generally in a situation where there is financial stress, the central bank has to figure out whether it is a liquidity problem and if infusing liquidity into the market will resolve some of those issues or is it a solvency problem, that is some of these entities have taken on really bad assets. If it is primarily solvency, you can address that by infusing liquidity in the market through more OMO's. If the problem is you need liquidity directed to certain places perhaps lend to certain entities who can make those loans and I think the recent move to allow banks to guarantee bonds by these entities is a good one. I think any kind of intervention should come after these entities facing difficulties have taken their own steps to bolster their balance sheets. If your view is your commercial paper is coming from six months from now therefore you are worried about rollover, shouldn't you be raising equity now? Even if prices are depressed, in order to back your balance sheet, that would be a good signal than running to the govt and central bank to bail yourself out. If you are willing to take all the steps, it is only when all the markets are frozen, that you go at which point the govt has to decide if it is liquidity or solvency. If it is solvency it may require wiping out the equity of the entity and taking them over as for example I think IL&FS has been doing.Well we tried three times when I was the governor to have a comprehensive discussion on this dividend because this always becomes a source of controversy especially as we get close to the budget time and I wanted to make it a much cleaner & a mechanical process and I see that we haven’t really solved the issue. Let me explain because this is an issue that people need to know about. The reality is the RBI is a fully owned subsidiary of the govt which means that whatever value of equity there is in the RBI is an asset of the govt there is no 2 questions about that it belongs to the govt. Now that said is there reason to leave some equity on RBI balance sheet and not take it out as an enormous dividend and the reason for that is we are a country which has a BAA rating and if the country went out to borrow in international capital markets for some emergency it would have to pay at BAA rating rates. Having the RBI as a separately capitalized entity which has a AAA rating gives you a vehicle which can actually make promises in international markets that are credible.One place where we had to make promise is was in the swap agreement in 2013 because we were essentially guaranteeing would pay up on that swap even though all the entities on the other side had to take was our word but we were good for it because we had plenty of capital to back the payments we would have to make and so in for a rainy day it helps to have one entity in the country which is well capitalized and which can hold its own in international capital markets. Now the first aspect of dividend is will it essentially maintain that high quality rating that you want for the RBI and today I think with the recent depreciation in the rupee the value of the RBI’s equity has gone up because remember the RBI has 400bn or so in dollar assets.When the rupee depreciates because its liabilities are in rupees essentially its equity goes up. So now it probably has reasonable amount of equities so then the second question comes, okay you have reasonable amount of equity you can pay…how much can you pay? And this is where the accountants keep telling us you cannot pay more than the profits. So we can pay the profits and we can pay as much as we make and that is what we were doing during 3 years I was governor. We paid all the profits not holding 1 naya paisa back. Then the 3rd question comes… can you pay more than this and ofcourse there is accounting issue, the credit worthiness issue but beyond that there is a third issue which is that the RBI is not like an ordinary PSU, it actually prints the money which means that if I pay an extraordinary dividend lets say 3 lakh crores it essentially means 3 lakh crore more of money is there in the capital markets and that is going to be inflationary. So as I pay 3 lakh cr to the govt I then have to sell govt bonds in the market to suck out equivalent 3 lakh crore in order that we do not have an inflationary situation.So unless I really make profits which I can give to the govt because the money made of people in the market, if I pay anything more it becomes inflationary and I have to take it back by selling bonds again and again I have emphasized that really there is no free lunch here. There is no 3 lakh crore that the RBI can give the govt and say do what you want with it because it gives from one hand and it sells an equivalent amount of govt bonds in the market. Net net the public sector borrowing requirement does not change. The govt has the same problem financing its deficit as it had before because this 3 lakh crore cannot be usedLet me not go into direct details of PCA norms. Look what I find problematic sometimes is arguments that why don’t you go down to Basel levels. Well it is true that on some issues Basel maybe a little more flexible than the Indian situation but there are many other places where the Indian situation is much more flexible than Basel. Ultimately if we go strictly by Basel we will get accused of being in the of thrall of foreign hands and so on you are listening only to foreigners. On the other hand if we do something based on the Indian situation you are accused of not following Basel especially when its tighter than Basel. I don’t think this is a debate is really is a serious one.What you have to ask is what are the Indian conditions that require a certain level of precautions and RBI is a professional that should be trusted if it could explain why that level is needed. By all means ask for an explanation but let them use their professional judgement. On the MSME, go to any country in the world find an MSME which says it isn’t starved for funds.The reality is MSME’s are hard to lend to which is why there is always clamoring for more funds. The right way to get more funds for them is to improve the formalization, the kind of business environment they operate in which is why I think if the improvement in doing business ratings that we have seen in the recent past is real then in fact that is a good way to help the MSMEs but simply opening the tap wider for them or saying less provisioning runs the risk of making loans that then come back to roost as higher NPAs.My worry is that we have to do a proper assessment of the loans we have already mad, what has been the experience with the Mudra scheme, what has been the experience with the other MSME lending and my worry is that NPAs there are far bigger than we think especially because there is a constant clamour to say don’t declare it an NPA that suggests that we should be more worried rather than less worried and I think that the government is right in going on a path to expanding the possibilities of MSMEs. The right way to do it is to improve the business environment & to improve the credit process but not to relax the credit standards and that I think is an important distinction which we should keep in mindLook I don’t know. I will go by the noises that are made and it certainly seems to be that there is an intent to bring these people to book but I do think from the longer term perspective if frauds go by unpunished it simply encourages more fraud. If there is a sense that there is no place on earth where you can hide because the long arm of the Indian govt will come after you, I think it will send a very sound message because you won’t be able to enjoy the ill gotten wealth anyway. This message needs to be sent if we are to protect out banking system. Because ultimaltely, you can’t prevent fraud but you can create the incentives such that it doesn’t pay.You can always enter an endless debate about this process. Let me just say that there is room for improvement on all sides on the governance of the banks. Both on the private sector as well as in the public sector both in the role that government plays as well as the role the RBI plays. I think we have to recognize that the level of NPAs in both the public sector as well as the private sector is not by any means a level to be proud of. So we have to all examine what went wrong and do what is necessary to put the banking system on a healthy turf because going forward the amount of lending we need to get to that 9-10% growth that we absolutely must have in order to employ all the people that are coming into the labor force. We need a healthy sector. Every side has to contribute and there’s really not much value in pointing fingers. There’s plenty of work for everyone to do.Look I think we need to have a longer term strategy in mind. I think historically short term moves to address short term problems have proven problematic. In the longer run if we want to make in India I think we have to have a far more open economy. We need to be part of global supply chains, we need to attract the business that is leaving China and going to Vietnam rather than coming to India That typically means much lower tariffs, of course we have lower tariffs over time but lower tariffs and a presumption that the tariffs will stay low and predictable because just haphazardly raising it here and raising it there will essentially make it hard to produce in this country.So I think given how much of the Products that we export are imported, our aim should be to lower tariffs generally and to have a more open the economy. Of course we can measure in that and think carefully about it but this knee jerk raising of tariffs here and raising of tariffs there to deal with what is fundamentally a savings investment problem I think is problematic.That said you know the current account deficit is heading towards 3% I think that is certainly one worry especially if the prices of oil that is so volatile pushes it higher. The other big worry is you know after 5 years of fiscal consolidation the general government deficit which is state + centre is still stuck at around &. In fact over the course of this government it has been going up not because the centre hasn’t done what it is supposed to do but because the states have been increasing their deficit. I think the one time we had the big jump down was when Mr Chidambaram came and reduced the fiscal deficit by about a percentage point but since then we have been stuck at about 7 for the aggregate.That’s a problem because 7% fiscal deficit doesn’t look that good when you have current account deficit to boot as well as you have growth which is at around 7You are asking me to choose between the devil & the deep blue sea. Both are bad. I think we have had a number of committees which have talked about responsible sort of fiscal management including the N K Singh Committee, I think we should take from all that , there is sometimes tendency to believe that all that markets worry about is that the bottom line no on the fiscal from the centre and clearly its much more than that as we have seen with the pricing of the govt bonds, the yields have moved up, even though the centre is bringing down the fiscal deficit the way you bring it down also matters. Whether you bring it down by actually matching revenues to expenditure or whether you get one time dividends from PSU which then go out and borrow in the market & therefore by that token don’t actually reduce the overall borrowing requirement . Over time we have steadily tried to improve our fiscal management and should continue to do so because ultimately the markets are not fooled by numbers if they don’t believe the underlying sort of fundamental change.Well it is a big over hang right now & I do think that we should be worried about the dialogue coming from each country, in the US make America great , in China make china great , every country wants to make itself great ,but it comes at the expense of relationships with other countries & the trade conflict right now is one of the worries …the hope is that what we will see overtime is a better understanding of each other’s position. I think there are some agreements to be had right now, if in fact China can convince The United States that it will change its behaviour on the acquisition of intellectual property & the extent to which it coerces companies coming into China to part with it & on the flip side if The US assures China that it is not going to use tariffs as a general means of blocking Chinas part to growth . There is an agreement to be had but it requires significant negotiation, it requires a deep understanding of each other’s position and ultimately it requires an acceptance that China is going to be one of the big powers and has to have place on the global stage eventually on par with the United States.I think it’s a process of learning & you can’t expect china to do that immediately, but at the same time the worst way to get China to become a responsible global player is to essential tell them that we don’t like your rise and are going to stand in your way. What that means is that then China will back off from international engagement focus on building its power looking both inward and regionally & eventually that would not be good for the world because it certainly would be a start of a cold war if not eventually a hot war. There needs to be much more dialogue between the countries & a cosmetic agreement which is possible at the G- 20 meetings will satisfy no body and will serve no purpose because ultimately you have to recognize the deeper sort of challenges that both countries face today.We have had 10 years of very easy money & that has resulted in high levels of leverage both in pockets in United states but also across the world, enormous amounts of money have flowed into the Emerging markets & what that means is as the FED continues to raise interest rate & it will do so because the US economy is chugging along very nicely, the labour market is tight, the job numbers that came were very healthy but also wage growth is picking up. So the FED is worried about inflation its going to raise interest rates & entities that have borrowed a lot specially in dollars are going to face the consequences down the line as rates go up and roll over becomes more difficult so this I think is a concern. Today it is massed by the strong growth of the US economy but remember this is a stimulus which has come late cycle. It’s a fiscal stimulus which eventually will wear off into next year at which point you will have FED high rates as well as the high debt but not the stimulus for growth. My sense is that we should be preparing for a more volatile world going forwardSo I learnt way back in my tenure that the IMF never comment on currencies and I will stick to that because we really don’t know what the true level should be. I think by most estimates there has been an adjustment of Indian rupee towards a more comparative value. I think depending on where you look from the Indian Rupee is probably appropriately valued and still you could either argue little undervalued or little overvalued, but I think that at this point our focus should not be so much on the rupee but on doing all the things that will allow the rupee to find its appropriate value which means focus on macro stability and ensure that india presents a very healthy picture to the world when that volatility comes.I don’t know what he has in mind ultimately it’s the trading desk at the Reserve bank which trades both in the futures market as well as in the spot market. So in that sense I am not sure what he means by dual role, if he means that there is more being voiced about the rupee from Delhi. Well that varies from administration to administration. The historical sort of norm has been that really it’s the RBI which talks about the exchange rate & typically in my time we didn’t talk about it either because it was a sensitive issue there is no way you can speak about it in the right way just leave it alone, don’t talk about it, don’t try and predict its going to be this or its going to be that and if you are moving markets with what you are saying you probably shouldn’t be saying it.I think the US is not afraid of using its various economic powers in directions where it thinks it will have effect and certainly I think in this administration there is a belief that if Iran is brought to its knees it will effectively agree to all that the administration wants in a new Iran treaty. So I think, we have got a wavier as I understand I for 6 months but I have no doubt that once the oil market is well supplied and prices are reasonable the administration will try again to shrink the supply of Iran in oil. Now that said if the oil market is well supplied & prices are reasonable it may not be directly harmful for India of course there are other geo-political issues at stake but I think that if in fact it comes when the market is tight which is possible then I think we could see a ramp up in oil prices which could be.