The Hindu Business Line : Monetary policy

This is with reference to "Is our monetary policy `sound'? (Business Line, January 11). The central bankers' prime responsibility is to use monetary policy to achieve monetary stability over long periods under varying conditions. This, as the article rightly points out, largely relates to maintaining the purchasing power of a currency. But there are two other significant elements that need to be balanced: One, the competitiveness of the export basket should not deteriorate, and, two, the mainstay of the people, be it industrial wages or the value of agricultural produce, should be stable.

While some may tend to ignore the comparison of gold to purchasing power as being to be too elitist, the situation of the farmer or the wages of our the semi-skilled worker do provide a definitive view. It is too simplistic to assume that all these can be optimised only using the monetary policy tool. But monetary policy can substantially support these, as in the case of the US, where Asian economies' surpluses are funding the subsidy of US farmers (budgetary deficit).

The decision of the US central bankers to believe in their systems and make their currency fully convertible in an era where everything was closed has brought them the first-mover advantage. Given this background, it is necessary for the central banker to come up with innovative mechanisms and steps, structured to capitalise on the individual country's strength.

India is poised to move into another era and path-breaking efforts are needed for it to take its rightful place among the world's premier nations.

S. Balakrishnan

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Monetary policy