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Business
09 Sep 2017

RBI governor's term and tenure must be safeguarded: Rajan

Can the RBI-government friction be checked?

A few days after revealing sensational details about the demonetization exercise, former RBI governor Raghuram Rajan has said the central bank head's "term and turf" have to be safeguarded.

For that, they have to be provided protection similar to judges, he said.

Rajan's tenure was marred by tensions with the government, but he pointed out that such friction has always existed.

In context

Can the RBI-government friction be checked?
Tension between the central bank and government is nothing new

History

Tension between the central bank and government is nothing new

Differences have existed between the RBI and the government since the start. Even the first Indian RBI governor at the time of independence, Chintaman Dwarakanath Deshmukh, stood up to then PM Jawaharlal Nehru.

Since then till Rajan, five of the 23 governors have been "requested" by the current governments to leave.

The remaining 18 didn't have an easy tenure either.

Status

In less than a year, it's Urjit Patel vs government

According to Rajan, even bureaucrats-turned-governors end up standing up for RBI . "If you're subservient, you won't get respect from staff, so people develop backbone quickly."

When Rajan's successor was being decided, Urjit Patel was chosen due to his "low-key, steady approach and experience in public policy".

In less than a year, tension between him and government has broken out after its monetary policy.

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Why such friction all the time?

The prime reason behind the constant tension between the two institutions is the difference in motives: the government's (finance ministry's) job is political, its goal is to maximize employment. However, the RBI's purpose is economic: it works towards minimizing inflation.

How can the conflict be weakened?

Suggestions

How can the conflict be weakened?

Rajan said even if the tenure is protected, central banks would be exposed to several risks if they stood up against the government, unless their turf was defined too.

"I would say make it clear what is the realm over which RBI's sway holds and let us not bring that down," he suggests.

Duvvuri Subbarao, Rajan's predecessor, recommends a single, five-year, non-renewable term.

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