Every Governor of the Reserve Bank of India (RBI) serves as the risk manager to the economy and in that capacity the incumbent is duty bound to the warn the government of the day if there are concerns about risks to macro-economic stability, former RBI governor Raghuram Rajan asserted.
“As the Governor of the Reserve Bank you are the most important technocrat dealing with economic risk management...you control $350-$400 billion in foreign exchange reserves, you determine the interest rate policy in the economy, you are also the lender of last resort... given all this you are effectively the risk manger to the economy,” Dr. Rajan said on Tuesday. “You have to warn about risk to macro stability and the risk to the growth agenda and so, in that duty, you sometimes have to speak up; in that duty, you sometimes have to say no to pressures that come down on you.”
‘Not a bureaucrat’
Speaking at the release of his book I do what I do at a function jointly hosted by Taj Coromandel, The Hindu Lit for Life and The University of Chicago, the former IMF chief economist referred to some of the speeches he had made as Governor that were less about monetary policy and more about the economic climate and said the RBI chief was unique in that the role was not that of a bureaucrat, who operates by a set of rules.
“You are not quite in the place of a bureaucrat. But you as RBI Governor have to make a judgment call... there are no rules to tie yourself to,” Dr. Rajan said.
“Sometimes you have to warn in public if the broader dialogue is going the down direction. It also obviates the general tendency of everybody to kick the ball down the road... as Governor, you don't have the freedom to kick the ball down the road... it is important that the role be understood in the right spirit; you sometimes have to say no, it has to be recognised.”
Banking sector stress
Fielding a wide range of questions from the former Editor-in-Chief of The Hindu N. Ravi about some of the passages in the book and the challenges he had faced as central banker, Dr. Rajan said the stress in the banking sector had been one of the areas where he felt the least progress had been achieved during his tenure. The adoption of the Insolvency and Bankruptcy Code (IBC) since then was a significant development that gave bankers the comfort of a shadow under which they could negotiate more confidently with defaulters.
“The single biggest challenge is cleaning up the balance sheets of public sector banks and getting them back to the business of lending,” Dr. Rajan said.
“The shadow of the bankruptcy code makes it easier... but still bankers need to be told that losses they take on account of commercial decisions... won't be inquired into.”
It was also vital that in the course of the implementation of the IBC, care must be taken to ensure that the system did not allow big defaulters to slip away and end up only netting the “small guy,” Dr. Rajan said.
On the government’s push to consolidate some of the public sector banks through mergers, the former RBI chief cautioned that cleaning up the lenders’ balance sheets was far more crucial as merging unhealthy banks could have its consequences. It was best, he opined, for banks to merge when they were healthy and that too with great care given the complexities such mergers had to contend with.
