Two and a half years after taking over as RBI governor ,D Subbaraoon Monday sought “legally-back formal autonomy”for the central bank besides suggesting a gradual shift to a committee-driven approach to setting of interest rates. But, when it came to losing RBI’s grip over what is now its turf-managing the government’s debt-the governor , who is a former Union finance secretary , stopped short of suggesting that the government abandon its plans to setup an independent debt management office.

“There is a need to reconsider the content and pace of this process in view of the revised circumstances post-crisis. The case for shifting debt management function out of the central bank is made on several arguments such as resolving conflictof interest , reducing the cost of debt, facilitating debt consolidation and increasing transparency . These advantages are overstated ,” Subbarao said in his speech at the central bank governance group in Basel , Switzerland.

Though RBI has in the pasttooopposed an independent debt management office, it is perhaps the first time the governor has been so candid in public . Acknowledging that the present system was working fine , Subbarao rejectedtheidea of inflation targeting saying it is neither feasible nor advisable in India. He said the drivers of inflation in India often emanate from the supply side, which is beyondthecontrolof monetary policy.

Countries , especially in the developed world , follow a system where the central bank and the government set a specific inflation target and itisthecentralbank’s responsibility to leverage the interest rate regime and ensure that inflation stays within the agreed level.

On the issue of setting interest rates , the governor outlined the present regime but went on to suggest that a committee-based approach such as the one followed by the US Federal Reserve and the Bank of England be adopted . At present , the decision on interest rates rests solely with the governor andhiscoreteam though the government is informed about it in advance . Though Subbarao termed the probable changein regime ashis personal view , he said a gradual shift should take place after certain preconditions are met.

“First , the central bank should be given legally-backed formal autonomy . Second , in a situation where inflation dynamics are moreoften dictated by supply side elements , the central bank’s ability to control inflation is restricted.

An MPC ( Monetary Policy Committee) mechanism in such a situation can weaken the coordination between the government and the Reserve Bank . However , when our financial markets deepen further , operating procedures improve and monetary transmission becomes more efficient , shifting to an MPC system becomes a realisticoption ,”he said .

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June 2021