Prime Minister Manmohan Singh has sent a clear signal to the Governor-designate of the Reserve Bank of India, Raghuram Rajan, about the need for a re-think on the tight monetary policy and hawkish stance on inflation.
Singh, who was the RBI Governor between 1982 and 1985, was speaking at a function to mark the release of a book, History of the RBI.
“The time has come to look at the possibilities and limitations of the monetary policy in a globalised economy and dealing with the constraints of the macro economic problems. That is where a fresh thinking is called for,” he said.
In India, structural reforms have helped establish the autonomy of monetary policy, free of fiscal policy compulsions. But, experience has shown that despite that autonomy, the degrees of freedom available for monetary policy management can be constrained by the Government’s fiscal stance, he said.
“The Reserve Bank has served our country with great distinction. But, I venture to think that the best is yet to come,” the Prime Minister added.
D.Subbarao has touched upon various facets of policy-making, the Prime Minister said adding, “I dare say, Raghuram Rajan will build on the experience of his predecessors to chart out a new course of action in very difficult circumstances that our economy is facing.”
In his address, the outgoing RBI Governor Subbarao mounted a strong defence of the RBI’s policies, arguing that it was “oversimplification” to say that central banks went for price stability at the expense of growth.
Summarising the history of the RBI, Subbarao asked: “Has the RBI history repeated itself?”
Answering his own query, he said: “That is a judgment call. But some issues do keep repeating in RBI history.”
By way of illustration, he said that on the issue of gold, “RBI history documents that about 35 years ago, the RBI got into a controversy over its auction of gold. Again, in 1991, there was a heated, if also emotional, debate in the country when the RBI pledged its gold reserves to tide over the balance of payments stress. It will be interesting to conjecture how history will judge the purchase of 200 tonnes of gold by the Reserve Bank from the IMF, and its more recent policies to restrain imports of gold.”