RBI committed to inflation control as it cares for growth, says Subbarao

Dismisses the view that govts are for growth and central banks for price stability

The differences between Finance Minister P Chidambaram and outgoing Reserve Bank of India (RBI) Governor D Subbarao over the central bank’s mandate refuse to die. Within days of Chidambaram seeking a Parliament message to the RBI governor that price stability was not RBI’s sole aim — but part of the larger goal of boosting growth and generating employment — Subbarao on Saturday shot back, saying the monetary authority had not ignored economic growth in trying to rein in inflation.

“RBI was committed to inflation control, not because it did not care for growth; but because it cared for growth,” Subbarao said at the release of the fourth volume of RBI’s history, at the prime minister’s residence.

He said it was oversimplification that governments were for growth and central banks for price stability. “It is another oversimplification to assert there is a tension between growth and inflation and that one has to play a trade-off between the two in policy making.”

MINT ROAD VS NORTH BLOCK

Issues where RBI differed with the FinMin
* FSDC
RBI opposed setting up a separate Financial Stability and Development Council (FSDC) on the ground that financial stability should be RBI’s exclusive mandate
* Debt management
Subbarao was critical of the finance ministry’s move for an independent debt management office (DMO). According to RBI, central banks have the expertise and instruments to manage government debt
* FSLRC
The Financial Sector Legislative Reforms Commission (FSLRC) report called for a total overhaul of the existing financial system — by merging the oversight functions of the market, commodity, insurance and pension regulators. RBI said, in a bank-dominated financial sector, the synergy between monetary policy and its role as a lender of last resort on the one hand and policies for financial stability on the other was much greater

The finance minister was away in his constituency, Sivaganga, to inaugurate State Bank of India’s 15,000th branch.

Subbarao tried to emphasise the point that the central bank was not indifferent to economic growth. “To contend that RBI is obsessed with inflation, oblivious to growth concerns, I think, is both inaccurate and unfair,” he said.

Chidambaram had said in the Rajya Sabha on Wednesday that RBI’s mandate was price stability but it had to be seen in the larger mandate of economic growth and employment generation.

“My government believes that while price stability is indeed important, it has to be in the larger context of growth and employment generation. Let Parliament take a stand on it, so that the message will go to the central bank,” Chidambaram had said.

 

He had cited US President Barack Obama's recent words that his successor should have two objectives -- price stability and employment generation. 
 

There was a time when the central banks have a prime mandate of ensuring price stability, Chidambaram had said. Not any longer, it is a part of larger mandate of boosting growth and employment generation, he had added. 

 

North Block and Mint Road under D Subbarao often perceived to be going against each other in terms of monetary stance. 

 

In October last year, the Finance Minister had announced a fiscal road map for five years, hoping that it would convince the central bank to lower the policy rate to boost economic growth. However, Subbarao did not relent and kept the rate intact.  The finance minister gave vent to his feelings,'If (the) government has to walk alone to face the challenge of growth, well, we will walk alone.'  

 

The RBI faces the dilemma of checking inflation or propel economic growth which crashed to five-year low of five per cent in 2012-13. The rupee depreciation in recent times has added another dimension to this dilemma, prompting Subbarao to describe the development in his last monetary review in July as 'trinity trilemma.'

 

The volume covers the RBI history from 1981 to 1997, which included the Balance of Payments crisis as well. The volume envelopes the tenures of six RBI governors - part of I.G. Patel’s stint to begin with, and covering Manmohan Singh, A Ghosh, R N Malhotra, S Venkitaramanan and ending with the duration of C Rangarajan.