Beware of de facto powerful position with low de jure status

When the responsibilities of the Reserve Bank of India (RBI) are fuzzy, its actions can continuously be questioned. Instead, if the constitutional authorities outline a framework for the responsibilities of the RBI, it can take actions consistent with those responsibilities and be held to outcomes. The inflation objectives recently set for the RBI by the Government are an example of what is needed. Critics can lambast the RBI if it fails continuously to meet the objectives, but if they want it to lower interest rates even when the RBI barely meets its objectives, they should instead petition the Government to change the objectives.  
Similarly, the RBI Board has adopted a risk management framework which indicates the level of equity the RBI needs, given the risks it faces. The dividend policy of the RBI then becomes a technical matter of how much residual surplus is available each year after bolstering equity. Frameworks thus reduce the space for differences.
The RBI's role in macroeconomic stability is, however, still fuzzy. While RBI clearly has responsibility for the safety and soundness of credit institutions and the stability of the external account, there are some areas that are hazier. For example, with an inflation-focused framework, the RBI's ability to be accommodative depends on fiscal prudence from the centre and states. How much should the RBI warn on fiscal profligacy, including the building up of contingent liabilities, and when should such warning be seen as interfering in the legitimate decisions of the elected representatives of the people? This is an area where clarity would be useful.     
STRENGTHEN OVERSIGHT: The freedom the RBI has to take operational decisions such as the FCNR(B) swap arrangement, albeit invariably in consultation with the Finance Ministry, is important. However, there are always government entities that are seeking oversight over various aspects of the RBI's activities. Multiple layers of scrutiny, especially by entities that do not have the technical understanding, will only hamper decision making. Instead, the government-appointed RBI Board, which includes ex-officio government officials as well as government appointees, should continue to play its key oversight role. In this regard, all important RBI decisions, including budgets, licenses, regulation, and supervision, are now either approved by the Board or one of its sub-committees. Vacancies in the RBI Board, which have remained unfilled for many months now, should be filled quickly so that the full expertise and oversight of the Board can be utilised.
It is also important that Parliament understand what the central bank is doing. The Governor and Deputy Governors interact regularly with various parliamentary committees, but we have also initiated a six-monthly interaction with the Parliamentary Standing Committee on Finance, where the Governor reports on the activities of the Bank, and the Committee offers its views and concerns.  
RANK OF RBI GOVERNOR: There is a reason why Central Bank Governors sit at the table along with the Finance Ministers in Group of Twenty (G-20) meetings. It is that the Central Bank Governor, unlike other regulators or government secretaries, has command over significant policy levers and has to occasionally disagree with the most powerful people in the country.
It is dangerous to have a de facto powerful position with low de jure status. Today, the RBI Governor has the salary of the Cabinet Secretary. He or she is appointed by the Prime Minister in consultation with the Finance Minister. The Governor's rank in the government hierarchy is not defined but it is generally agreed that decisions will be explained only to the Prime Minister and the Finance Minister. There is an informal understanding in India that the Governor has the room to make needed decisions. In the interests of macroeconomic stability, none of this should be changed, though if these issues are ever revisited, there may be some virtue in explicitly setting the Governor's rank commensurate with her position as the most important technocrat in charge of economic policy in the country.
COMMUNICATION: I do not fool myself into thinking that reporters and TV cameras follow me around everywhere because I am a magnetic speaker. They follow RBI Governors around because they may offer market-moving information on policy. Fortunately, I have escaped unintentionally saying anything that moves markets.  
At the same time, while different RBI Governors have different approaches to communication, no one can dispense with it. Unlike a developed country, where the Central Bank Chairman can offer periodic Delphic pronouncements about the course of monetary policy, and occasionally remonstrate with Parliament or the government about the course of fiscal policy, in our developing democracy the RBI Governor has to continuously make the case for the actions the central bank is taking, including the many structural reforms that are underway.  
Indeed, communication is as much about educating as it is about informing. For instance, even as I explained to entrepreneurs and retail borrowers why interest rates were not falling faster, I had to use the price of dos as to explain to pensioners why they were actually better off earning lower nominal but higher real interest rates. Public understanding can help ease the way for reforms, as well as increase support for policies. The RBI Governor therefore has to explain again and again.  
Occasionally, of course, the Governor has to warn about the dangers of certain courses of action or certain tendencies in the economy for growth and macroeconomic stability. Finally, the Governor is also a role model for the youth in this country, and should therefore not duck the responsibility to urge them to follow the highest standards of citizenship when he or she is invited to speak directly to them.    
The last few years, working with dedicated colleagues at the RBI and the Finance Ministry, have been so fulfilling that I think I have received rather than given. I believe we have undertaken important reforms in payments, in banking, in the conduct of monetary policy and liquidity management, in financial markets, and in the resolution of distress, as well as within the RBI itself. Only time will tell whether they will have lasting impact, but I tried to do the best job I could, without fear or favour. This is the last public speech I will give in India for a while - my successor has to take over the RBI's communication and I want to get out of his way. It has been an honour to work for the country and especially to talk to people like you, its future. Thanks for listening to me.
This is a slightly edited version of the last public speech Raghuram Rajan gave as RBI Governor on September 03, 2016 at Stephen's College, New Delhi, link: https://rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1021. Rajan left RBI the next day, September 04.