Prime Minister Manmohan Singh Saturday called for evolving a fresh thinking on RBI’s monetary policy in a globalised economy and dealing with the constraints of its macro economic policies.
“The time has come to look at the possibilities and limitations of the monetary policy in a globalised economy and dealing with the constraints of the macro economic problems. That is where a fresh thinking is called for,” Singh said.
“I think Raghuram Rajan (governor designate) will evolve a policy with the help of professional persons for a national consensus if we have to carry on with implementing social and economic changes in a complex economy,” Singh said.
The remarks assume significance in the context of the raging debate over RBI’s hawkish policy stance on checking inflation vis a vis government priority on growth.
Singh was speaking after releasing RBI History — Looking Back and Looking Ahead the fourth volume of 78-year-old central bank’s history, at a simple function at his Race Course residence.
The subject also came up in the speech of outgoing RBI governor Duvvuri Subbarao, who in his welcome address, said the debate on growth-inflation balance has been clouded by some “oversimplifications.”
The function was attended by a galaxy of personalities including former RBI governors — Amitabha Ghosh, C. Rangarajan, Bimal Jalan, Y.V. Reddy — present and former deputy governors and ministers of state for finance Namo Narain Meena and J.D. Seelam.
The Prime Minister, himself a governor between 1982 and 1985, recalled that when he was chosen to head the central bank, he had no idea of what a monetary policy was.
Singh said he had then asked noted economist Prof Sukhamoy Chakravarti to head a committee to go into what a monetary policy should do and that report was a big help to him.
Singh expressed the hope that governor-designate Raghuram Rajan, who was also present, will build on his predecessor’s work to chart a new course of action in the very difficult period of economy now.
“Rajan is a distinguished economist of world repute and I wish him all the best in RBI under his leadership,” Singh said.
The Prime Minister said the RBI has done the country proud in shaping the monetary and credit policies and also influencing the line of credit in rural areas. “RBI has served the country with distinction. But I would say the best is yet to come,” Singh added.
Singh also complimented Subbarao saying he had served the country and RBI well.
On growth-inflation balance, Subbarao said the first and possibly the most important debate was about balancing between growth and inflation in the policy context.
“This is a balance that both governments and central banks struggle with. In my view, this debate has been clouded by some oversimplifications. One such oversimplification is to say that governments are for growth and central banks are for price stability. Another oversimplification is to assert that there is a tension between growth and inflation, and that one necessarily has to play the trade-off between growth and inflation in policy making,” Subbarao said.
Subbarao said RBI’s monetary policy aimed at three objectives-price stability, growth and financial stability.
“To contend that the Reserve Bank is obsessed with inflation, oblivious to growth concerns, I think, is both inaccurate and unfair. The Reserve Bank is committed to inflation control, not because it does not care for growth, but because it does care for growth. There is any amount of evidence to show that an evidence to show that an environment of low and stable inflation is a necessary precondition for sustainable growth. How history will evaluate the Reserve Bank on its balanced commitment to growth and inflation is an interesting conjecture,” the outgoing governor said.
Referring to another big debate now in India and around the world on the fiscal dominance of monetary policy, Subbarao said in India the structural reforms piloted by Manmohan Singh as finance minister and governors Rangarajan and Reddy and Montek Singh Ahluwalia as finance secretary had helped establish the autonomy of monetary policy free of fiscal policy compulsions.
On the challenges and way forward for RBI, Subbarao said one of the big challenges for it would be to learn to manage both economic and regulatory policies in a globalising world.
“Dr Jalan, as the governor, showed extraordinary competence and leadership in insulating India from the impact of the Asian crisis in the mid-1990s. Dr Reddy had the courage of conviction to remove the metaphoric punch bowl before the party got wild,” Subbarao said.
Subbarao said yet the global financial crisis was so virulent that it affected virtually every country in the world. Did the Reserve Bank learn from the sagacity of Dr Jalan and the wisdom of Dr Reddy to manage the current crisis?
“Governor-designate Rajan, who will take over from me early next month, is here in the audience. The challenge for you, governor Rajan, will be how you will use your formidable intellect, scholarship and global experience to shape the Reserve Bank as a knowledge institution that will set standards for how an emerging economy central bank should manage macro economic policy in a globalising world. I am aware this is history in the future but history that will nevertheless be historic,” Subbarao said.
Asking a “clichéd” question whether history repeats itself, Subbarao said, “Has RBI history repeated itself? That is a judgement call. But some issues do keep repeating in RBI history. I will give just one illustration.”
Citing the issue of gold, the governor said documents about 35years ago RBI got into a controversy over its auction of gold.
Again in 1991, there was a heated, if also emotional, debate in the country when the RBI pledged its gold reserves to tide over the balance of payments stress.
“It will be interesting to conjecture on how history will judge the purchase of 200 tonnes of gold by the Reserve Bank from the IMF in 2010, and its more recent policies to restrain imports of gold?” Subbarao said.
Jalan, who was chairman, advisory committee of RBI History Volume 4 (1981-1997), said the writing of history was a difficult process in which the History Cell of RBI played an important role. It took three to four years to complete the task.
Referring to the various eras of the RBI’s functioning including the planning era after independence and during Manmohan Singh’s governorship, Jalan said at one time the RBI’s functioning was determined by the government.
“Even the interest rates were decided by the finance ministry,” Subbarao said.
“The Prime Minister was a pioneer in shaping the relative autonomy when he moved to the RBI in 1982. When there were differences between the government and the RBI he could still shape its autonomy in the monetary area in consultation with the government,” Subbarao said.
Between 1991-96, Jalan said, India’s economy was emerging and the period between 1981-97 marked India’s emergence as a globalised open economy recording fast growth.
The fourth volume of history is only 10 per cent RBI history and the rest is the history of macro economy of India, Jalan said.
The Prime Minister appeared to agree with him when Subbarao said the history of RBI is the history of growth of India since independence.