Financial stability mandate must gel with monetary policy: Gokarn

The financial stability mandate given to central banks should be compatible with operation of monetary policy to manage inflation expectation and economic growth, according to Subir Gokarn, deputy governor of RBI.

The global crisis has questioned the premise that price stability and financial stability are complementary. Rather financial stability can be jeopardised even in an environment of price stability and macroeconomic stability, Gokarn said in his address at a symposium on financial stability. This is the theme for the two-day conference of governors of central banks in South Asia.

He said the predominant focus on price stability might have yielded low and stable inflation in terms of prices of goods and services. However, such lowering of returns in the commodity/service producing sectors could have diverted the search for yields to the financial sector. This approach has put a question on the pre-crisis consensus of running a monetary policy framework with ‘a single target’ (like price stability) and ‘a single instrument’ (like short-term policy interest rate).

The financial stability mandate and governance arrangements for central banks must be compatible with their monetary policy responsibilities. It is now impossible to imagine sustained growth without financial stability. In case of South Asian countries, there may be specific features of the financial sector that pose challenges to the stability of the system, absent in advanced economies. The crucial goals of financial literacy and financial inclusion are not ignored in the overdrive for financial stability, Gokarn said.