Subbarao favours autonomy to achieve medium-term goal

Favouring greater autonomy, Reserve Bank of India (RBI) Governor D Subbarao today said greater freedom would help central banks to focus on price stability in the medium term.

Monetary policy typically acts with a lag, and price stability therefore has to be viewed in a medium-term perspective, Subbarao said in a speech at the SAARC Finance Governors' symposium at Kumarakom in Kerala.

"Having autonomy frees the central bank from the pressure of responding to short-term developments, deviating from its inflation target and thereby compromising its medium-term inflation goals," he said.

In a bid tackle inflation, the RBI raised key policy rate nine times since March 2010. Last month, it raised short term lending rate and savings bank rates by 50 basis points to check price rise.

"Even as the importance of central bank autonomy in monetary policy is now broadly accepted, there is a growing view that central bank decision making has to become transparent and that central bankers have to be more accountable for the outcomes of their decisions," he said.

The standard argument for central bank autonomy is that autonomy enhances the credibility of the central bank’s inflation management credentials, he said.

He noted that the much prized autonomy of central banks has come under assault post-crisis with an influential view gaining ground that one of the principal causes of the crisis was the unbridled autonomy of central banks.

Subbarao said with central banks assuming increasing responsibility for financial stability, the autonomy question has acquired an additional dimension and greater urgency.

The main apprehension is that a formalised mechanism for coordination between the government and the central bank for financial stability will alter the level, content, process and frequency of interaction between the two, and over time this will erode the autonomy of the central bank, he said.

It is argued that it will be difficult to keep monetary policy and policies for financial stability strictly apart, and a formal forum for coordination would facilitate spillover into monetary policy, he added.

Subbarao also pointed out that the financial stability is not exclusive responsibility of central bank.