|Storm in a tea cup|
|Wednesday, 11 May 2011 00:00|
RBI Governor Duvvuri Subbarao is right when he says inflation targeting is neither feasible nor advisable in India. But while saying this, it’s important to keep in mind RBI does do inflation-targeting, it’s just that inflation-control is not RBI’s sole focus. So, RBI has to look at policies that will help raise growth rates, help in raising financial inclusion, ensuring exchange rates are stable, and so on. If RBI wasn’t doing informal inflation-targeting, we wouldn’t have had a situation as happened some years ago when, while the finance ministry was in favour of a loose monetary policy, RBI’s view and actions were quite different. In any case, as Subbarao has pointed out, inflation-targeting is complicated in India since there are administered rates on postal savings as well as other rigidities in financial markets.
It’s not too clear why Subbarao opposed the separation of the Debt Management Office (DMO) from RBI since the public perception is RBI signed on to the separation proposed by the finance ministry. If anything, RBI should welcome the move as it frees it from the conflict that comes when it is in charge of placing government debt as well as managing inflation—as the government’s debt-manager, RBI would want a looser monetary policy while, as the controller of inflation, it may want a tighter policy. That said, though, the independent DMO has to work in close coordination with RBI—placement of government debt affects interest rates and you can’t have RBI playing one tune while the government plays another. Which is why, even today, the amount of government’s borrowing calender, made in consultation with RBI, is made public at the beginning of the year.
Indeed, it is not practical for a central bank to be fully autonomous from the central government. While there has to be functional autonomy, in times of crisis (such as the one in 2008) both fiscal and monetary policy have to work in complete coordination. Perhaps what the RBI Governor had in mind when he said a legally-backed autonomous structure of the central bank was required was really the issue of functional autonomy, of its primacy among financial sector regulators, for instance.