Comments
The Reserve Bank of India Governor, Dr D. Subbarao, on Monday said monetary transmission, though improving, is still a fair bit away from best practice.
The factors inhibiting the transmission process are: an asymmetric relationship between depositors and banks; administered interest rates on postal savings that are not adjusted in line with prevailing interest rate trends; and rigidities in the financial markets.
The aforementioned factors dampen the efficacy of monetary signals and complicate the adoption of an inflation targeting regime in India, said the Governor in his address at the meeting of the Central Bank Governance Group in Basel.
Given the compulsions of democracy and the large population of poor, any government in India has always to be, and indeed has been, sensitive to price stability even if it means sacrificing output in the short-term, he added.
“So, the argument of divergence of natural preferences as between the government and the central bank that underpins the inflation targeting framework does not hold in the case of India.
“Indeed both the Government and the Reserve Bank have to factor in the short-term growth-inflation trade-off in their policy calculations,” said the Governor.
Separation of debt management
The coordination of debt management with monetary operations needs to continue to tackle situations arising out of excess capital flows requiring forex intervention from the Reserve Bank and the consequent sterilisation through issuance of Government bonds by the RBI.
“This makes the case for separation much weaker in the revised circumstances,” said the Governor.
Referring to the complexity of managing the debt of the states, the Governor observed that the sensitivity of the states to entrust debt management to an agency of the Central Government also needs to be kept in view given the political-economy dimensions of the country's federal structure.
“Market borrowings have emerged as the dominant source of deficit financing at the sub-national level. Taken together, the borrowing by States has attained a critical mass vis-à-vis the absorptive capacity of the market…separation of debt management from central bank seems to be a sub-optimal choice,” said the Governor.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.