‘Monetary and fiscal policies have to act in harmony’

Reserve Bank of India Governor D. Subbarao has asserted that central banks across the globe need to be independent in making monetary policy decisions in the wake of emerging global scenario.

In his opening remarks during the C. D. Deshmukh Memorial Lecture by Prof. Joseph Stiglitz, Dr. Subbarao said, “the issue of monetary policy independence has acquired greater potency following the expansion of the mandates of central banks, and their more explicit pursuit of real sector targets such as growth and employment.’’

In this context, he cited the recent happenings in Japan which saw Bank of Japan coming under considerable political pressure to adopt a higher inflation target so as to create more room for growth stimulus. “The example of Japan is recent and high profile, but by no means an exception,’’ he said.

Stating that the revolution in monetary policy was not exclusive to advanced economy central banks, he said emerging market economy central banks, too, were going through revolution with different nuances. “Learning from the experience of several country-specific and regional crisis, they have also added, either explicitly or implicitly, financial stability to their objective functions,” he pointed out. The emerging market economy central banks had to contend with “forces of globalisation” in their policy formulations, he said. Notwithstanding the revolution that was sweeping the monetary policy across global economies, he felt that “central banks cannot fix economies by themselves”. He felt that the governments needed “to act too from the fiscal side”. He asserted that “monetary and fiscal policies have to act in harmony”. More than these, “the governance needs to improve to inspire the trust and confidence of consumers and investors,” he added. “The crisis is still with us. The revolution in monetary policy is still a work in progress,” he said. And, the monetary revolution had thrown up a number of questions, he added.

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