RBI for better monetary, fiscal synergy

By fe Bureaus

Monetary policy has become the first line of defence to combat credit crisis and there has to be deeper coordination between monetary and fiscal policies. Monetary policy should be sensitive to fiscal concerns, according to D Subba Rao, Governor, Reserve Bank of India.

Speaking at the Reserve Bank's platinum jubilee celebrations in Hyderabad, he said that the borrowing programme has prevented a dramatic drop in the interest rates and there is a need to manage short-term demand. During the course of panel discussion, he said that there has to be coordination between monetary and fiscal policies. This has become a challenge even as the financial crisis has raised questions about the role of central banks.

The first challenge going forward is to manage the coordination between monetary and fiscal policy, not only in India but around the world and the monetary policy has become the first line of defence.

The second challenge is defining the mandate of central banks and reforming the regulatory architecture. He also said that inflation targeting does not deliver macroeconomic and financial stability.

The next challenge is to get the right balance between regulation and liberalisation, which means that there should not be over regulation which might suppress growth impulses, costs and benefits of regulations. And the final challenge, how to conduct monetary policy in the globalised world. The challenges to manage capital flow are not unique to India alone but other countries as well, the governer added.

Amid crisis, central bank governors have become unlikely heroes, and some of them have rock star status, as they are seen as part of the solution, though at time central banks are part of the problem and are also villains, he said.