Mumbai: The Reserve Bank of India (RBI) cannot focus only on inflation and leave growth and sovereign debt management to the government, governor D. Subbarao said on Thursday even as he insisted the banking regulator should continue to remain autonomous.

RBI can neither target inflation nor can it avoid raising rates if inflation is caused by supply side factors not linked to monetary policy because there is no single data for inflation and food occupies half of India’s inflation basket, Subbarao said at an international research conference in Mumbai organized by RBI.

“It’s unrealistic that RBI can target inflation completely oblivious of the other objective —growth. A lot of analysts questioned us last year when we were raising rates, suggesting that it will impact growth."

“A suggestion is that RBI target only core inflation but it is only 50% of the basket and hence unrealistic for us to do it. RBI is the first line of defence no matter where inflation is coming from," Subbarao said.

Task at hand: RBI is the first line of defence no matter where inflation is coming from, said Subbarao. PTI

In January, RBI cut the cash reserve ratio (CRR), or the amount of deposits banks need to park with it, by half a percentage point to 5.5%, releasing 32,000 crore.

It also said that its policy stance “has now shifted to growth", explicitly stating that rates will come down.

The CRR cut happened after 13 policy rate hikes between March 2010 and October 2011 to curb persistently high inflation.

Wholesale price inflation for December at 7.47% is still above RBI’s target of 7% by March-end.

“RBI cannot be unmindful of growth concerns," Subbarao said.

The governors of central banks of Pakistan, Brazil, Nepal, Singapore, Bangladesh and the Maldives, who attended the conference, expressed concerns on large government borrowings, capital inflows and autonomy of central banking.

“Capital inflows is a key factor. The objective of maintaining domestic stability is paramount for both monetary and fiscal policy. Ideally, fiscal policy should be tight and monetary policy should be loose but, unfortunately for us, it is the reverse," Yaseen Anwar, governor, State Bank of Pakistan, said.

Fazeel Najeeb, governor and chairman of Maldives Monetary Authority, suggested that to remove the tendency of politicians going slack fiscally ahead of elections, one should have an independent fiscal authority.

“(The) fiscal authority has the authority to tax but knowing fully well that they do not have money, they borrow...to spend (creating problems)," he said.

Ravi Menon, managing director of Monetary Authority of Singapore, also agreed that “many of the problems were rooted in unsustainable fiscal deficits."

But the suggestion to separate government debt management from the central banks did not find many takers.

“If governments can neither decide monetary policy nor fiscal policy, what will they do? clean drains?," economist and columnist Martin Wolf, who also attended the conference, said.

“It must not be forgotten that managing public debt was the main reason why Bank of England was formed. Managing monetary policy is only a recent phenomenon," Wolf said.

Subbarao said the governments in the developing markets are not “intentionally trampling on" central banks. “The sensitivity to central banks is same both in developing and developed economies. The RBI Act says that government can direct RBI in consultations with the governor, but in 76 years this has never happened," he said.

“In emerging economies, it is difficult to build Chinese walls between the government and central bank because if there is a government committee formed, can the governor say that pure monetary policy cannot be discussed?" Subbarao asked.

Brazilian central bank governor Alexandre Antonio Tombini said it was important for advanced economies to ensure extra capital flows do not spill over into commodities and other emerging markets.

“We tightened policy to contain credit growth and sterilised inflows, but flows were too much and in spite of everything there was still money left on the table to feed credit growth. The free money offered by developed economies like the US, when it reverses policy, leaves a lot of damage on the financial sector," Tombini said.

Subbarao said it is wrong to expect anything from the developed economies. “We have to take policies of advance economies as a given; we cannot change that. But we must have clearly laid out strategic policies in the public domain and also have tactics like when to intervene (in the forex market) and play the market just like other central banks."

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