London: Pitching for greater autonomy for central banks, RBI Governor D Subbarao on Thursday said that if they are allowed to function independently, economies will be best served.
"Economies will be best served if governments ensure that their central banks are able to conduct monetary policy independently and free of fiscal compulsions.
"This will require, among other things, responsible and credible fiscal consolidation," he said while speaking at the European Economics and Financial Centre here.
In the Indian context, Subbarao said that by far the biggest concern stems from the large fiscal deficit as it adds to aggregate demand and thereby to inflation pressures.
The high fiscal deficit also crowds out the private sector and impair monetary policy transmission.
"Credible fiscal consolidation is, therefore, a necessary precondition for stabilising inflation and securing non-inflationary growth," Subbarao said.
The government's commitment to the Fiscal Responsibility and Budget Management (FRBM) mandate during 2003-08 afforded the RBI the necessary space to implement monetary policy aimed at low and stable inflation, he added.
Observing that over the last one year the government embraced fiscal consolidation with commendable resolve, he said the fiscal deficit was brought down to 4.9 per cent of GDP in 2012-13, better than earlier projection.
"...It clearly enhanced the credibility of the government's current year fiscal deficit target of 4.8 per cent of GDP," Subbarao added.