RBI chief stresses independence in monetary policy

Last Updated: Thu, Jan 03, 2013 14:30 hrs

Mumbai, Jan 3 (IANS) Central banks need to be given full independence in formulating monetary policy and there should not be any political pressure on them, Reserve Bank of India (RBI) Governor Duvvuri Subbarao said Thursday.

"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 unemployment," Subbarao said.

Subbarao's remark was significant as it came against the backdrop of increasing pressure on the RBI from a section of the government and the business community to cut interest rates to boost growth.

The RBI has been maintaining tight monetary policy for the last couple of years due to inflationary pressure even though this has resulted in slowing down the economic growth.

Speaking at the C.D. Deshmukh Memorial Lecture event here, Subbarao referred to the political pressure in Japan in formulation of monetary policy.

"In recent weeks, we have all seen this issue of central bank independence play out in Japan with political pressures on the Bank of Japan 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.

Renowned economist and Nobel laureate Joseph E. Stiglitz delivered the lecture organised in memory of C.D. Deshmukh, the first Indian governor of the RBI.

However, Subbarao said the central bank cannot fix the economic problems alone.

"Central banks cannot fix economies by themselves. Governments need to act too from the fiscal side, and monetary and fiscal policies have to act in harmony," he said.

"On top of this, governance needs to improve to inspire the trust and confidence of consumers and investors," the RBI governor added.

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