Reserve Bank of India Governor D Subbarao, on Wednesday, said that Federal Reserve Chief Ben Bernanke’s recent statements concerning easing of stimulus “was nothing new” and that what happened in the markets after was a good example of how “market participants react to global developments”.
The central bank chief also pointed out that with the world slowly exiting the 2008 crisis, crafting monetary policy was much more difficult as it “had to calibrate an exit from monetary easing”.
“Over the last month there has been talk of QE (quantitative easing) tapering off. If you actually analyze that, the U.S. Fed and the Chairman of the U.S. Fed did not say anything new. But the market reacted in ways we did not expect,” Dr. Subbarao said, while delivering a talk on the ‘Changing role of RBI’ at the Reserve Bank Staff College’s golden jubilee celebrations.
“What we need to do is whole heartedly try to understand, interpret external developments and use that when developing policy,” he added.
Pointing out that being open-minded was an essential part in transforming the RBI into a knowledge institution, Dr. Subbarao defended the central bank’s recent move to allow corporates apply for new bank licences.
“When new evidence comes, we must shed old views and move on. People ask me why should we allow corporates [in banking]. They [the people who ask] should know the world has changed… we debated quite transparently and extensively. We determined that it was in the best national interest to allow corporates,” he said.
On similar lines, Dr. Subbarao said, “it was necessary to amend the Banking Regulation Act before we moved on with the process.”
“Many people have asked me why we wasted three years to wait for the amendments. This was because the safeguards that the Act gave the RBI was very important for admitting corporates into the banking sector,” he said.
Talking about how the RBI needed to become a learning institution, Dr. Subbarao stressed on how it was not possible to “control everything”.
“We must learn to take some things as given. You have to take the market as a given and respond to that. You cannot tell the market how to behave. One cannot say that the market must behave this way, just because one believes the market should behave in a certain way,” he said.
Warning that the RBI should not “indulge in groupthink”, Dr. Subbarao said that the central bank should try to encourage non-conformist thinking.
“It is true that it has not been in the DNA of central banks to be communicative. But the RBI cannot function in an ivory tower, even if has the tendency to do so. While the stereotypical view is that the RBI is committed to only inflation, different demographics have different priorities,” he said.
Dr. Subbarao also sought to turn the magnifying glass on the RBI, saying that the central bank must take accountability seriously.
“We very generously guard our autonomy, but in order to demand it we must first render ourselves accountable. I have suggested that the RBI Governor should go in front of a parliamentary committee to encourage the accountability process. Even if nobody asks, we must volunteer to render accountability,” he said.
Above all, the central bank chief said, “the RBI must be driven by its dharma.”
“We must be driven by values and ethics, at our core, we must become a knowledge institution.”