As the Economic Survey had pointed out, RBI’s equity capital which equals a third of its balance-sheet is much higher than the ECB’s 20%-indeed, central banks in the USA and the United Kingdom work with less than 2%.
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But in the same breath he went on to say that the central bank can not be free of all constraints as it has to work under a framework set by the government. But analysts are still awaiting the composition of the new monetary policy committee, and the name of the new RBI deputy governor, for a clearer indication of the government’s inclinations.
On his push for elevating the rank of the RBI governor, now at par with Cabinet secretary, he said, “There is a reason why central bank governors sit at the table along with the finance ministers in G-20 meetings”. Welcoming the government’s decision, Rajan said about his successor, “I am confident that Dr. Urjit Patel, who has worked closely with me on monetary policy for the last three years, will ably guide the Monetary Policy Committee going forward in achieving our inflation objectives”.
Incidentally, it was Patel often referred to as “Dr Patel” by Rajan who scripted a new framework for fighting price rise, which earned him the informal title of “inflation warrior”. “The RBI Governor therefore has to explain again and again”. The economist said central banks across the world will find it hard to raise their policy rates because of a fear that the move will “see growth slowdown”. He said that India needs a strong and independent central bank and said RBI’s ability to say “no” to government must be protected.
“Because of. unfinished task, I was willing perhaps to stay provided we could reach the right kind of agreement, we didn’t”. He was incharge of monetary policy at the apex bank.
The RBI said it would explore introducing interest-free banking products in consultation with the government, a key detail as this opens the prospects of supportive legislation. “The credit flow to the industry should not decline”, says former RBI chief Bimal Jalan.
With public sector banks accounting for a large portion of the bad loans, the clean-up exercise has raised heckles of many in the government as well, though not many have been public with their views, fearing adverse commentary. Rajan also issued two banking licences to Bandhan and IDFC, 11 payments banks and 10 small finance banks.
“Question was how much time”, he said. In addition, the RBI outlined in its monetary policy statements that it aims to bring headline CPI inflation down to 5 percent by March 2017.
He cited the example of recently outlined inflation target.
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The recently announced inflation targeting framework sets a headline CPI inflation target of 4 percent +/- 2 per cent until first quarter of 2021.
