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| RBI cannot be inflation targeter: Subbarao |
| BS Reporter / Hyderabad Sep 21, 2010, 00:32 IST |
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 Says the central bank also has to maintain financial stability.
Reserve Bank of India (RBI) Governor Duvvuri Subbarao said inflation would determine the future policy and the effort would be to manage the balance between growth and inflation.
“It is not going to be so much on bringing policy rates to a neutral level. Inflation will determine the policy action,”' he said.
In every policy review since October 2009, RBI had tried to manage the balance between growth and inflation but some numbers had been worrisome, he said at the University of Hyderabad’s foundation day lecture on ‘Dilemmas in central banking’.
“RBI cannot be an inflation targeter as it also has the mandate of maintaining financial stability and not just price stability,” he said
On the new wholesale price index (WPI), Subbarao said: “RBI worked with the government to improve WPI. Certainly, it is not the best practice but we are hoping it to be better than the earlier index.”
Food inflation, as measured by WPI, stood at 15.1 per cent for the week ended September 4, primarily due to a rise in prices of vegetables and milk. The latest figures were according to the new inflation data series, with a revised base of 2004-05, and had seen some enhancement due to a change in the methodology of collecting data.
The figure is not comparable with the previous week when food inflation stood at 11.47 per cent, calculated on the older base year of 1994-95.
Food inflation had been fuelling the overall inflation rate for the last one year and was being closely monitored by RBI. However, since this February, inflation in the manufacturing category had added on to food inflation, the governor said.
On the finance ministry’s efforts to set up a Financial Stability and Development Council (FSDC), which is read as a move to impinge on the central bank’s autonomy as the banking regulator, Subbarao said FSDC was mooted by the finance minister and, therefore, the government would deal with it.
The issue of RBI’s autonomy had resurfaced when the government set up the joint statutory committee for hybrid products. RBI had been critical of the mandate of FSDC, especially on its role in maintaining financial stability.
“In the next April policy, RBI would bring out a paper on whether it should be made mandatory for our foreign banks to operate as a subsidiary. We want to get public opinion on this from all stakeholders,” he said.
With the new Basel-III norms, the cost of funds for the banks would increase and the norms would be stiffer than Basel-II. One of the dilemmas for the central banks would be to manage a balance between costs and benefits of regulation, he said.
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