The Hindu Business Line : Sound external policies needed to avert crisis: Jalan

EMERGING market countries need to adopt policies, which prevent an external crisis by adoption of sound external management policies, according to Dr Bimal Jalan, Governor, Reserve Bank of India.

Speaking at the special meeting of African Governors of the Central Banks convened by the Bank for International Settlements (BIS) at Basel, on Monday, Dr Jalan said the primary responsibility for crisis prevention has to be that of the country itself.

Dr Jalan was invited by the BIS to speak to African Governors' on the Indian experience, which has been highly successful in maintaining financial stability during a period of turbulence in many of the emerging market economies in the world.

The meeting held on December 16 was attended by heads of 14 African countries, said an RBI press release.

Dr Jalan highlighted the need for pragmatic and realistic macro-economic policies for safeguarding balance of payments in emerging markets.

"A stable macro-economic environment with low inflation, low current account deficit and reasonable growth is essential to prevent crisis,'' he said.

Dr Jalan also spoke on the Reserve Bank of India's present position on money supply and inflation targets for monetary policy formulation. He said that experience in many countries showed that the money supply target was not very effective in controlling inflation because of the instability in money demand functions.

Similarly, there are several technical problems in adopting a specific inflation target to which monetary policy should respond, such as the composition of inflation to be targeted in the context of the large weight of food and fuel commodities in price indicies. These items were not very sensitive in short run changes in monetary policy.

The RBI has been generally following a "multiple indicator approach'' whereby all monetary as well as other macro-economic indicators are closely monitored by them, said the press release.

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