Govt borrowing impedes interest rate cut: Subbarao

Reserve Bank of India (RBI) governor D Subbarao said the rapid expansion of the government borrowing programme was coming in the way of the central bank’s monetary policy objective of a lower interest rate regime and called for more independence for the central bank.

The RBI cut key policy rates six times between October 2008 and April 2009 to an unprecedented low, "hoping interest rates will come down, but the borrowing programme has militated against it," Subbarao said at a panel discussion titled “Challenges for the Central Banks”. The discussion, which also brought together three former central bank governors, was organised by the RBI as part of its platinum jubilee celebrations.

The RBI governor, however, pointed out that no policy decision had been taken so far about the government raising its level of borrowing. This was despite the fact that Finance Minister Pranab Mukherjee announced plans to borrow Rs 451,000 crore to fund the government's spending programme.

On the future of central banking, he said, "The first challenge going forward is to manage the coordination between monetary and fiscal policy...This very rapid expansion in the borrowing programme has impeded monetary transmission."

In that context, he said, making monetary policy independent of fiscal policy was an important reform measure.

Subbarao added that the second challenge for central banks is defining their mandate and reforming the regulatory architecture. The questions that are now being raised, he said, include whether there are flaws in the accountability mechanisms and whether the objective of financial stability falls through the cracks.

... You can’t define financial stability. It’s like pornography, you can’t define it but when you see, you know it,” he said.

In the same humorous vein Subbarao commented on the role of central bankers. In the midst of the global financial crisis, central bank governors have become unlikely heroes, he said. “Some of them have rock-star status because they are seen as part of the solution, but some people ask whether the central banks are part of the problem.”

Later, speaking to reporters on the sidelines of the seminar, the governor said it was too early to take action on inflation, which fell to a 33-year low of -1.74 per cent for the week ended August 1.

“Yes, the agricultural situation is disturbing and there will be pressure on food prices. We are sensitive and mindful of the drought’s impact on inflation and will take appropriate steps,” he said.

C Rangarajan, a former governor and current chairman of the Prime Minister’s Economic Advisory panel, said he foresaw an escalation in prices towards the end of this year and RBI should think in terms of taking appropriate measures when prices rise.