RBI Governor's thought-provoking poser

The inaugural speech delivered on February 1 by the Reserve Bank of India Governor, Dr D. Subbarao, at the second International Research Conference held at Mumbai, is an eye opener in more ways than one. If anyone was ever under the impression that Dr Subbarao is more earthy and pedestrian compared to his predecessor, Mr Y. V. Reddy, that speech puts paid to it in no uncertain manner. It shows him on a par with the best of the exponents of the issues and challenges in an arena so full of unpredictable variables making even the most carefully crafted solutions go awry.

He has made a thoroughly professional job of taking up for a scholarly and, at the same time, policy-cum-action-oriented, treatment a highly complex theme relating to the role of the central banks in forging a balanced and integrated strategy to safeguard the triple imperatives of price stability, financial stability and sovereign debt sustainability.

His speech also broadens the ambit of the debate on the extent of symbiosis, synergy and synchronisation that should exist among monetary, fiscal and public policy domains on the one hand, and, on the other, more concretely, between the central banks and the national, especially democratically-elected, governments. The point to remember here is that the latter are in no position to thrust bitter bills down the throats of those who have put them in power and perforce have to take a pragmatic and placatory approach.

New Trilemma

Dr Subbarao, while enumerating the range of options in harmonising the functions, which sometimes seem mutually-conflicting, of different players, has also delineated possible future contingencies and scenarios and suggested what he regards as appropriate frameworks for dealing with them.

The trigger for the selection of this arcane subject, representing what Dr Subbarao calls the New Trilemma, is the seismic ravages of the global financial crisis which, in turn, has very nearly drowned the Euro Zone in a tsunami of debt.

The affected entities are still struggling to work out a sure-fire remedy, as also draw up contingency plans which will put in place a sufficiently strong and enduring system giving timely warning against emerging catastrophes and facilitating the launching of measures to head them off.

If, as Dr Subbarao says, the central banks, including, by implication, the RBI, had so far been construing their role to be confined to price stability as the single objective and short-term interest rate as the single instrument with which to combat it, the fault is theirs, and theirs alone. Even before the onset of the global financial crisis and sovereign debt shocks, it should have been clear to the central banks that the three objectives of price stability, financial stability and sovereign debt sustainability had interconnected etiologies and that a holistic understanding of the banks' responsibilities was imperative.

In short, all the arguments that Dr Subbarao has now marshalled to establish the case for such a connectivity have been relevant and valid all the time, and there is really no new trilemma that could be said to have suddenly cropped up.

The different attributes of the trilemma reinforce each other, and have an indisputable impact on growth itself. They are not an exclusive offshoot of times of crisis, but constitute a challenge to be addressed in normal times as well.

EVOLVE GUIDELINES

Actually, the central banks, rather than the national governments, are, or should be, better equipped to embark on such a holistic mission since, in terms of both theory and tradition, they are capable of rising above the pulls and pressures associated with political dispensations.

Thus, a strong central bBank, with a strong individual heading it, can do plenty not only to achieve the three objectives covered by Dr Subbarao's speech, but also gently and unobtrusively to steer government's policies towards financial prudence in the comprehensive sense of the term.

For instance, in respect of States which squander away resources to pander to vote-banks, the RBI can let them twist without giving them any accommodation.

It is for the central banks to evolve the guidelines and boundaries for such an activist role, without waiting for any cue from any other economic player, but with extensive consultations preceding it to avoid hitches and ensure smooth implementation.

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