Markets

Urjit Patels resignation should be seen as a note of protest: Raghuram Rajan

The move towards giving the board more operational authority would impinge on the professional managements capacity to regulate and supervise, Raghuram Rajan, Former Governor, RBI, tells Supriya Shrinate of ET Now.

Edited excerpts:

Your former colleague and your successor at the central bank has decided to call it a day, Urjit Patel statement says that he is quitting for personal reasons but you and I both know that things came to head between the central bank and the central government. How are you going to read this exit of Urjit Patel?

It is a matter of great concern. We need to ask what was the circumstances that led to Dr Patel resigning and the government must take extreme care in how it proceeds further in its relationship with the RBI. Wiser head should prevail in the current environment and the circumstances that led to this resignation have to be reversed.

Does the question of autonomy and independence worry you because this is happening at a time when efforts were being made to make RBI a more board governed institution?

The act of resignation by a government servant or a regulator is really a note of protest. It is saying that the person cannot stay on given the kinds of policies that are being thrust upon them. It is really the only act that they have in their reservoir when faced with circumstances they cannot deal with. So, in that sense. this should be seen as a statement of protest and given that and given that Dr Patel is very honourable civil servant in some sense and a regulator I think we need to understand what prompted this act and I do not think Dr Patel is given to act in lightly so I think the government must note.

On the issue of the powers of the board, it is extreme change in the nature of the governance of the RBI for the board to become an operational board, that is to make operational decisions. Earlier, it was advisory and that was appropriate because the professionals on the RBI took decisions while the boarder public which was represented on the board advised.

The move towards giving the board more operational authority would impinge on the professional managements capacity to regulate and supervise and if that is to be the case, then the board should be composed of professionals as opposed to the larger public.

For it to be composed of a variety of industrialist, politicians and so on, while at the same time giving them authority over the decisions of the RBI to some extent, violates the principle of how the RBI used to operate and should operate.

ET Now: If RBI is going to be a board-governed institution which is nowhere the case in the world, the board should be there as a supervisor. Also, what happens to those big flash points between the government and the RBI over liquidity for NBFCs, dilution of PCA or the big issue over reserve transfer?
Raghuram Rajan: Again I think that cooler heads should prevail. Dr Patel has made a statement and this is the ultimate statement for a regulator or a civil servant. The statement should be respected and we should go into the details of why there was this impasse which forced him to take this ultimate decision. This is something that all Indians should be concerned about because the institution is really important both for growth and for growth in equity in the economy.

ET Now: This resignation is coming in at a time when his deputy governor Dr Viral Acharya has also made his position very clear on some issues. He has in fact used very strong words which would have hurt autonomy of the RBI and so is that going to be the next exit?
Raghuram Rajan: I do not want to speculate on that. I want to say that at this point it is very important that there is recognition of the statement that is being made and powers that matter should make an attempt to try and deal with the situation with all the powers that they have. I think the situation that has come about is a result of intransigence and we need to figure out how to quieten things while respecting the institutional capabilities and authority of the RBI.

ET Now: Many people believe overt politicisation of the board has led to this. There are very vocal critics of the governor and the RBI policy on the board right now. What is this going to mean as far as the institutional autonomy is concerned? RBI is not an ED, it is not a CBI, it has got impeccable reputation. What does this do to the credibility of the institution?
Raghuram Rajan: First, due credit should be given to the RBI for doing some of the things it has done in the last few months, For example, inflation is well under control and it has performed creditably on a number of functions that it is entrusted with. We must recognise the fact that in India strong institutions sometimes will offer constructive suggestions on how the economy should be run and the fact that it is not in consonance with what the government wants is not necessarily opposition but is something to be respected. That is because it comes from an institution which wants the long-term growth and stability of the country.

We need to work out ways in which such constructive suggestions can be given without creating a sense that this is opposed to the government or to long-term health of economy.

ET Now: You said something very important which is where you said that the powers that matter should now get in and salvage the situation. How at this juncture can the government salvage the situation? How do things begin to quieten from here on?
Raghuram Rajan: I do not want to go into the details because I am not present there and I do not know details of what the differences are but clearly we know what are the circumstances that led to this particular act and powers that are have to figure out how to sort of preserve the credibility and the strength of the RBI as an institution, given that this is probably the second resignation in the entire history, maybe even the first explicit resignation because the earlier one was more implicit.

ET Now: This resignation is coming in at a time when apparently North Block and Mint Street were not even on talking terms. A board meeting is coming up on the 14th of December. Do you believe that it would be a safe bet for the government now to get in a bureaucrat at the helm of RBI even at the cost of monetary policy decision making?
Raghuram Rajan: What the government and the country more generally should consider is has the institution been run well under the hands of governors and to what extent should there be a shift and how will that benefit? To a certain extent, some amount of independence is useful especially as far as aspects like monetary policy go. I do not think the country is necessarily benefitted by having yes man at the head of regulatory agencies.

At the same time, undue confrontation is also not useful. I think a via media has to be found where there is a dialogue but where it is necessary the regulator essentially has the ability to say no and this will always be the sort of mix of respect as well as cooperation that makes the relationship work and clearly it is not working.

ET Now: There is an absolute breakdown in relationship where the governor and government are not talking. You have said mitigate the tension, mitigate the risk but what is the risk that comes out of here? .Does this add yet another tension for the markets, yet another uncertainty of sorts?
Raghuram Rajan: I do not want to speculate on what the market will do. This is a serious situation which we must try as best as possible to remedy and to do that. we have to go into the causes of what led to this resignation and see how we can remedy matters by dealing with those causes. This is not a light concern. Whether it affects markets or not, long term, the institution itself is critical to the government and trying to figure out how we can remedy the situation is very important for this government.

Original Article

Markets

Urjit Patels resignation should be seen as a note of protest: Raghuram Rajan

The move towards giving the board more operational authority would impinge on the professional managements capacity to regulate and supervise, Raghuram Rajan, Former Governor, RBI, tells Supriya Shrinate of ET Now.

Edited excerpts:

Your former colleague and your successor at the central bank has decided to call it a day, Urjit Patel statement says that he is quitting for personal reasons but you and I both know that things came to head between the central bank and the central government. How are you going to read this exit of Urjit Patel?

It is a matter of great concern. We need to ask what was the circumstances that led to Dr Patel resigning and the government must take extreme care in how it proceeds further in its relationship with the RBI. Wiser head should prevail in the current environment and the circumstances that led to this resignation have to be reversed.

Does the question of autonomy and independence worry you because this is happening at a time when efforts were being made to make RBI a more board governed institution?

The act of resignation by a government servant or a regulator is really a note of protest. It is saying that the person cannot stay on given the kinds of policies that are being thrust upon them. It is really the only act that they have in their reservoir when faced with circumstances they cannot deal with. So, in that sense. this should be seen as a statement of protest and given that and given that Dr Patel is very honourable civil servant in some sense and a regulator I think we need to understand what prompted this act and I do not think Dr Patel is given to act in lightly so I think the government must note.

On the issue of the powers of the board, it is extreme change in the nature of the governance of the RBI for the board to become an operational board, that is to make operational decisions. Earlier, it was advisory and that was appropriate because the professionals on the RBI took decisions while the boarder public which was represented on the board advised.

The move towards giving the board more operational authority would impinge on the professional managements capacity to regulate and supervise and if that is to be the case, then the board should be composed of professionals as opposed to the larger public.

For it to be composed of a variety of industrialist, politicians and so on, while at the same time giving them authority over the decisions of the RBI to some extent, violates the principle of how the RBI used to operate and should operate.

ET Now: If RBI is going to be a board-governed institution which is nowhere the case in the world, the board should be there as a supervisor. Also, what happens to those big flash points between the government and the RBI over liquidity for NBFCs, dilution of PCA or the big issue over reserve transfer?
Raghuram Rajan: Again I think that cooler heads should prevail. Dr Patel has made a statement and this is the ultimate statement for a regulator or a civil servant. The statement should be respected and we should go into the details of why there was this impasse which forced him to take this ultimate decision. This is something that all Indians should be concerned about because the institution is really important both for growth and for growth in equity in the economy.

ET Now: This resignation is coming in at a time when his deputy governor Dr Viral Acharya has also made his position very clear on some issues. He has in fact used very strong words which would have hurt autonomy of the RBI and so is that going to be the next exit?
Raghuram Rajan: I do not want to speculate on that. I want to say that at this point it is very important that there is recognition of the statement that is being made and powers that matter should make an attempt to try and deal with the situation with all the powers that they have. I think the situation that has come about is a result of intransigence and we need to figure out how to quieten things while respecting the institutional capabilities and authority of the RBI.

ET Now: Many people believe overt politicisation of the board has led to this. There are very vocal critics of the governor and the RBI policy on the board right now. What is this going to mean as far as the institutional autonomy is concerned? RBI is not an ED, it is not a CBI, it has got impeccable reputation. What does this do to the credibility of the institution?
Raghuram Rajan: First, due credit should be given to the RBI for doing some of the things it has done in the last few months, For example, inflation is well under control and it has performed creditably on a number of functions that it is entrusted with. We must recognise the fact that in India strong institutions sometimes will offer constructive suggestions on how the economy should be run and the fact that it is not in consonance with what the government wants is not necessarily opposition but is something to be respected. That is because it comes from an institution which wants the long-term growth and stability of the country.

We need to work out ways in which such constructive suggestions can be given without creating a sense that this is opposed to the government or to long-term health of economy.

ET Now: You said something very important which is where you said that the powers that matter should now get in and salvage the situation. How at this juncture can the government salvage the situation? How do things begin to quieten from here on?
Raghuram Rajan: I do not want to go into the details because I am not present there and I do not know details of what the differences are but clearly we know what are the circumstances that led to this particular act and powers that are have to figure out how to sort of preserve the credibility and the strength of the RBI as an institution, given that this is probably the second resignation in the entire history, maybe even the first explicit resignation because the earlier one was more implicit.

ET Now: This resignation is coming in at a time when apparently North Block and Mint Street were not even on talking terms. A board meeting is coming up on the 14th of December. Do you believe that it would be a safe bet for the government now to get in a bureaucrat at the helm of RBI even at the cost of monetary policy decision making?
Raghuram Rajan: What the government and the country more generally should consider is has the institution been run well under the hands of governors and to what extent should there be a shift and how will that benefit? To a certain extent, some amount of independence is useful especially as far as aspects like monetary policy go. I do not think the country is necessarily benefitted by having yes man at the head of regulatory agencies.

At the same time, undue confrontation is also not useful. I think a via media has to be found where there is a dialogue but where it is necessary the regulator essentially has the ability to say no and this will always be the sort of mix of respect as well as cooperation that makes the relationship work and clearly it is not working.

ET Now: There is an absolute breakdown in relationship where the governor and government are not talking. You have said mitigate the tension, mitigate the risk but what is the risk that comes out of here? .Does this add yet another tension for the markets, yet another uncertainty of sorts?
Raghuram Rajan: I do not want to speculate on what the market will do. This is a serious situation which we must try as best as possible to remedy and to do that. we have to go into the causes of what led to this resignation and see how we can remedy matters by dealing with those causes. This is not a light concern. Whether it affects markets or not, long term, the institution itself is critical to the government and trying to figure out how we can remedy the situation is very important for this government.

Original Article