Days before he steps down as Governor of Reserve Bank of India, a candid D. Subbarao on Saturday characterised as “inaccurate and unfair” the contention that the central bank was “obsessed with inflation, oblivious to growth concerns.”
Terming as oversimplification the contention that governments are for growth and central banks are for price stability, he said it was another oversimplification to assert that there is a tension between growth and inflation and that one has to play a trade off between the two in policy making.
“To contend that the Reserve Bank is obsessed with inflation, oblivious to growth concerns, I think, is both inaccurate and unfair,” he said at a function at the Prime Minister’s residence to release the fourth volume of RBI history.
Mr. Subbarao’s remarks come against the backdrop of Finance Minister P Chidambaram’s assertions in recent weeks that RBI should not focus solely on containing inflation but also look at the larger mandate of growth and job creation.
The RBI Governor, who will demit office on September 4, spoke on growth-inflation balance and 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,” Mr. Subbarao said.
He said RBI’s monetary policy aimed at three objectives — price stability, growth and financial stability.
“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 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, he 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 the way forward for RBI, Mr. Subbarao said one of the big challenges for it would be to learn to manage both economic and regulatory policies in a globalising world.
