Hyderabad, Aug 5 (IANS) The Reserve Bank of India (RBI) cannot be and should not be a pure inflation targetter and it needs to balance between growth, price stability and financial stability, said RBI Governor D. Subbarao.
Stating that inflation targeting is neither desirable nor practical in India, he felt that as drivers of inflation emanate from supply side, the monetary policy has limited role to play.
‘In an emerging economy like ours it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context. The Reserve Bank needs to balance between growth, price stability and financial stability,’ Subba Rao said.
‘More often than not, the drivers of inflation in India emanate from the supply side. Food items have a weight of 46 to 70 percent in various CPIs (consumer price indexes) and are notoriously subject to the supply shocks which are normally beyond the pale of monetary policy.’
The RBI governor was delivering the 10th C.D. Deshmukh memorial lecture on ‘Financial crisis – some old questions and may be some new answers’ at the Council for Social Development, southern regional centre, here Thursday.
The central bank head pointed out that post crisis the dominant view around the world is shaped by the new environment hypothesis which says that flexible inflation targeting, rather than pure inflation targeting, is more efficient.
According to this hypothesis, if inflation is way off target, a central bank’s first call is to bring it within acceptable range, and if inflation is within the range, the central bank should focus on other objectives.
Subbarao also said the autonomy of monetary policy from fiscal compulsions was once again under threat and called for credible efforts by both the government and central bank to resolve it.
‘The challenge for the government is to continue the fiscal consolidation that started with this year’s budget and for the Reserve Bank to regain the space to conduct monetary policy free of fiscal compulsions.?
‘In the aftermath of the crisis, fears about the fiscal dominance of monetary policy have resurfaced. There are widely shared concerns about the extraordinary fiscal expansion necessitated by the crisis, and when and how long it will take to reverse that,’ he said.
He pointed out that, like in most countries, in India too fiscal stimulus was part of the crisis response, and monetary policy had to acquiesce in elevated government borrowing.
‘We can make progress only if we are willing to accept new answers to old questions when circumstances change,’ he added.