Hyderabad: Reserve Bank Governor D Subbarao said on Friday making monetary policy independent of fiscal policy is an important reform measure for the country.
Saying that coordination between monetary and fiscal policies has become a challenge, he said the government's huge borrowing programme came in the way of the monetary policy objective of a lower interest rate regime.
The Reserve Bank cut its policy rates several times since October "hoping interest rates will come down, but the borrowing programme has militated against it," Subbarao said at a function here.
"The first challenge going forward is to manage the coordination between monetary and fiscal policy...this very rapid expansion in the borrowing programme has impeded monetary transmission," Subbarao said.
The Governor said that it is too early to take action on inflation, which fell to a 33-year low of "- 1.74 percent" for the week ended August 1.
The second challenge, Subbarao said, is defining the mandate of central banks and reforming the regulatory architecture.
In the midst of the global financial crisis, central bank governors have become unlikely heroes. "Some of them have rock star status" as they are seen as part of the solution, he said.
However, Subbarao added, some people are asking whether the central banks are part of the problem.
The questions that are now being raised include was the mandate of the central bank clearly defined, were there flaws in the accountability mechanisms, did the objective of financial stability fall through the cracks, Subbarao said.
"... you can't define it (financial stability). It's like pornography, you can't define it but when you see you know it," he said, adding that the central banks and governments have become increasingly dependent on each other.
Later speaking to reporters on the sidelines of the conference, Subbarao said it was too early to get concerned about inflationary pressures in the prevailing drought
situation in the country.
"Yes, the agricultural situation is disturbing and there will be pressure on food prices. We are sensitive and mindful of the drought’s impact on inflation and will take appropriate steps," he said.
Prime Minister's Economic Advisory panel Chairman, C Rangarajan foresaw an escalation in prices towards the end of this year.
As per the wholesale price index, the price rise was currently negative, but the RBI should think in terms of taking appropriate measures when prices rise, Rangarajan
added.
Subbarao said the economic growth rate projection of 6.5 percent stood good even now and pointed out that the RBI would not discuss in the public domain any mid-course policy corrections.
Bureau Report
First Published: Friday, August 14, 2009, 18:26