Sunday, May 11, 2014

Raghuram Rajan

Being young has its own disadvantages. One tends to be abrasive and is easily provoked.

"I determine the monetary policy. I say what it is. The government can fire me, but the government doesn't set the monetary policy. So, in that sense, am I independent! Well, I am happy to talk to the government. I am happy to listen to the government but ultimately the interest rate that is set is set by me," Raghuram Rajan said at St. Gallen Symposium in Switzerland.

Independence has to be exercised and not asserted. What the RBI Governor went on to add is disturbing:

"We (RBI) control the monetary policy. In India, what happens is when we want to do something big, we go, tell the government this is what we want to do and the government is usually supportive.... We talk to each other," he said.

Major announcements like revision in Repo rate are required to be kept as confidential as budget measures like tax rates. If RBI is truly independent, the finance ministry should not become privy to RBI's major moves before they become public just like even the RBI Governor will not be told budget measures in advance. Violation of this requirement facilitates insider trading. For example, if a particular bank gets tipped off about changes in Repo rates or SLR by the finance ministry, it gets an unfair advantage over other banks.

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