JOIN USWhile maintaining the government has not interfered so far with RBI’s functional autonomy, RBI Governor D Subbarao made a case for its “legally-backed formal autonomy” while addressing a meeting of the Central Bank Governance Group in Basel, Switzerland.
He also made a case for setting up a Monetary Policy Committee (MPC) to advice RBI on policy issues. “My own view is that we should be moving towards an MPC system, but in a phased manner,” Subbarao said.
He added, however, that as a pre-conditions for shifting to the MPC system, the central bank should be given legally-backed, formal autonomy. Shifting to MPC system, Subbarao said, would become a realistic option with the deepening of financial markets and improvement in operating procedure.
The RBI, pleading helplessness in taming rising prices in the short-term, also maintained it cannot do much to contain inflation which is caused by inadequate supply of essential items. “Monetary policy, as is well known, is an ineffective instrument for reining in inflation emanating from supply pressures”, Subbarao said.
The drivers of inflation in India, he added, “often emanate from the supply side which are normally beyond the pale of monetary policy...It is unrealistic, under these circumstances, to expect the Reserve Bank to deliver on an inflation target in the short-term”.
Although the RBI for the ninth time since March 2010 raised its key policy rates to check price rise, the headline inflation has remained well above 8 per cent as against the comfort level of 5-6 per cent.
Noting that efficient transmission of monetary policy stance was essential for checking price rise, he said, “In India, monetary transmission has been improving but is still a fair bit away from best practices.” He added to dampen the efficacy of monetary signals and complicate the adoption of an inflation targeting regime in the country. The Governor further said that in a country like India inflation targeting was “neither feasible nor advisable”.
Meanwhile, RBI also opined against setting up a separate entity - Debt Management Office (DMO) - to manage the sovereign debt of the government, saying only the central bank has the requisite expertise to manage market volatility.
“Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, will not be able to do,” Subbarao said.
“The case for shifting debt management function out of the central bank is made on several arguments such as resolving conflict of interest, reducing the cost of debt, facilitating debt consolidation and increasing transparency. These advantages are overstated,” Subbarao said.