RBI's Subbarao makes a case to preserve independence of central banks
MDT/PTI 04 January 2013

Central banks cannot fix economies by themselves and the governments too need to act from the fiscal side and both monetary and fiscal policies have to act in harmony

Mumbai: Reserve Bank of India (RBI) Governor D Subbarao has said there is a need to preserve the independence of central banks as their mandate has expanded in recent times, reports PTI.


"The issue of monetary policy independence has acquired greater potency following the expansion of mandates of central banks and their more explicit pursuit of real sector targets such as growth and unemployment," he said.


Subbarao cited Japan, where there is political pressure on the Bank of Japan to adopt a higher inflation target so as to create more room for growth stimulus, and said the case is "by no means an exception".


His comments come weeks ahead of the RBI's third quarter policy review scheduled for 29th January in which it might go for a cut in interest rates.


Subbarao said government and RBI need to act in harmony as the central banks on their own cannot fix economic woes.


"Central banks cannot fix economies by themselves. Governments need to act too from the fiscal side and monetary and fiscal policies have to act in harmony," Subbarao said.


Welcoming Nobel laureate Joseph Stiglitz at the CD Deshmukh Memorial Lecture, he said the monetary and fiscal policies should "act in harmony" to achieve common goals.


The comment comes in the backdrop of growing instances of apparent divergent views between the RBI and the Finance Ministry on a string of issues, including lowering interest rates and issuance of new bank licences.


The RBI had not lowered interest rates despite nudging to do so by Finance and Commerce Ministries. The central bank did not initiate the process of issuing bank licences despite assurance from Finance Minister P Chidambaram that government would amend the Banking Act in time.

10 years ago
Difference in perception about, say, causes and effects of inflation or when to take a certain measure to induce growth or improve liquidity in the system between individuals holding different positions of responsibility is natural and can be handled by mutual discussion. What we find with political leadership, GOI and corporates on one side and statutory bodies which do not have the same access to media or legislative process on the other side is an ongoing tussle emanating from the expectation of the GOI that statutory bodies should implicitly obey the dictat of ministers, or still worse, ‘ministries’. This approach impairs the equilibrium based on the checks and balances consciously built into the system of governance by the framers of Indian Constitution. The concern of RBI Governor has to be viewed in this context.
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