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'Western style' central bank autonomy not for India, says Modi mentor

Influential figure claims officials trained abroad are ignoring reality

A prominent figure in India argues that the central bank should be led by those trained at home, not abroad.
A prominent figure in India argues that the central bank should be led by those trained at home, not abroad.   ¬© Reuters

NEW DELHI -- India's central bank should work in tandem with the government and not make their differences public for the sake of the country's image, an influential Indian figure has said, amid reports of a rift between the two institutions over the Reserve Bank of India's independence.

In an interview with the Nikkei Asian Review on Friday, Ashwani Mahajan, the head of Swadeshi Jagran Manch, said that the whole idea of central bank autonomy was not the Indian way and came from the U.S. and Europe. SJM is the economic wing of social organization Rashtriya Swayamsevak Sangh, the ideological parent of Prime Minister Narendra Modi's ruling Bharatiya Janata Party.

Tension has been brewing between the two sides in recent months over policy issues such as liquidity for nonbank financial companies, capital requirements for weak banks, and lending to small and midsize businesses -- areas in which the RBI's moves have been at odds with the government's expectations. The Confederation of Indian Industry on Wednesday released a long list of issues that require "immediate intervention" of the RBI.

Mahajan's comments come a week after the RBI Deputy Governor Viral Acharya warned the government against undermining the central bank's independence.

Mahajan said that both sides should exercise restraint in making their differences public, as airing them would give the country a bad name. "At the same time, it hurts the economy," he said, adding that RBI Gov. Urjit Patel and his deputies should resign if they cannot temper their views.

Developed economies face issues related to stability, he said, but in India the major issues include growth, employment, uplifting the poor, the development of small-scale industries and the promotion of domestic manufacturing.

Ashwani Mahajan, chief of the Hindu nationalist Rashtriya Swayamsevak Sangh's economic group Swadeshi Jagran Manch.   © Reuters

"These are our realities, and if the government suggests something, the RBI should not feel their autonomy is affected," he said. "Everybody understands the jobs of the RBI and the government go hand-in-hand."

He highlighted the parliament's RBI Act, which holds that the bank is accountable to the house and therefore not separate.

Mahajan maintained that the concept of autonomy was brought in by former RBI Gov. Raghuram Rajan.

He said that senior bank staff, "who have been imported or parachuted in," were trained in foreign institutions. "They understand only their [foreign] philosophy, thinking and systems, but our systems are always different so you can't superimpose America in India."

It is always better not to bring consultants from outside but from within India, those who have been brought up and trained here in our institutions, he said.

He noted that the RBI governor holds the same rank as the government's ministers of state. "There is no autonomy, but the central bank works separately on principle," he said, adding that when it came to issues such as economic growth and the development of small-scale industries, the RBI has to work in tandem with the government.

Mahajan was critical of the RBI for not doing enough to stem the fall of rupee, which has depreciated 15% this year against the dollar. The RBI is "the custodian of foreign exchange reserves," he said, adding that in the last four years the central bank had built up its foreign exchange reserve to $400 billion from $312 billion.

"[Foreign institutional investors] were coming and you absorbed all that money," he said. "You never allowed the rupee to appreciate then. You are interfering in the market by absorbing all that and building your foreign exchange reserve. Now what stops you from releasing those reserves when these [foreign institutional investors] are leaving?"

Mahajan said that a one rupee fall against the dollar costs India $2 billion in its annual oil import bill.

In his opinion, the RBI is over-obsessed with monetary policy and needs to work in tandem with the government's fiscal policies. In his organization's advisory capacity, it can only tell the government what is wrong and what should be corrected. "Ultimately, it's government which has to decide."

Nikkei staff writer Rosemary Marandi contributed to this article.

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