In an exclusive conversation with CNBC-TV18, Rajan, a former governor of RBI, re-established the importance of the Apex Bank and said it should be protected as a national institution, and the unhealthy disagreements between the Union Treasury and the RBI should not continue to escalate.
"Once you appoint a governor or deputy governor, you should listen to them," Rajan said, adding that he congratulates Viral Acharya for his warning in support of RBI's autonomy.
Rajan said the ongoing gap between the Ministry of Finance and the RBI could be resolved if both sides respect the intention of the other.
The central bank has the freedom to say no if the government pushes it to leniency, Rajan said, "The government should submit its case to the bank and let RBI decide."
Regarding the role of the RBI Board, he said that his role in the past was not to make operational decisions, but to focus on a broader strategy and ensure good governance.
"So you're here to make sure the government's money in the RBI is well spent, for example, the RBI does not pay too much salary, etc., but also acts as a resonant board, which is why we people from other countries have company walks, very well-known people, "he said.
"So my goal is for the board to protect the institution, not to serve the interests of others, to protect the health of the institution, but also to provide comprehensive, reasonable advice." The Board's goal is to be Rahul Dravid – reasonable, thoughtful and not with due respect, Navjot Sidhu, "he said.
The grassroots war between the RBI and the center regarding the autonomy of the central bank has been open since last week.
The new round of exchange began with a speech by one of the four deputy governors of the RBI, Viral Acharya. He strongly supported the independence of the central bank in its core functions and gave a talk on what happens to the economy if RBI's autonomy is jeopardized.
"The risk of undermining the independence of the central bank is catastrophic," Acharya had said.
"Governments that fail to respect the independence of the central bank will sooner or later incur the wrath of the financial markets, trigger economic fires and be ashamed of the day they undermined an important regulator," he added.
The top bureaucrats and the political leadership in Delhi's electricity corridors responded adequately to the central bank's emergency call. According to a Reuters report, the government is "very angry" with Acharya's remarks.
Finance Minister Arun Jaitley silently contradicted Acharya, naming it unnamed. Regulators should reconsider their traditional approach and consult with a wider range of stakeholders. "I think stakeholder consultation needs to be of a very high quality for any regulatory mechanism, which will probably lead to a re-evaluation of traditional ideas and opinions," Jaitley said.
Rajan also said that India is in a much better position in terms of inflation, and the government and RBI should be duly encouraged to keep inflation low.
The country is growing faster than most other countries, Rajan said, voicing concern about the current account deficit (CAD).
The former chief economist of the International Monetary Fund said that monetary policy around the world will tighten in the future.
Commenting on the US Federal Reserve's interest rate hike, Rajan said the US benefited from a significant fiscal stimulus, adding that US employment data will determine whether the Fed will continue to increase its guidance.
The former RBI governor expects the US Federal Reserve to raise interest rates only once and thrice next year. However, strong growth in the US is unlikely to last as the Fed further lowers its interest rates.
The EU central bank will also discontinue its quantitative easing by the end of this year, he added.