Greater need to ensure autonomy to central banks: RBI

Posted By: Religare
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Greater need to ensure autonomy to central banks
The Reserve Bank of India talked about the greater need and urgency to ensure the autonomy of the bank. Currently, as per the constitution, government holds power to direct and appoint the governor and four deputies for the central bank. Thus, supporting the coordination required between the regulators and the government for preserving the financial stability, Duvvuri Subbarao, governor RBI, said, "It is important for the government and the regulators in India to develop conventions and practices which will serve the goal of preserving financial stability without eroding the autonomy of the regulators."

Subbaro further clarifying the position stated that there are many central banks that do not have an explicit mandate for financial stability. However, following the crisis in 2008, several jurisdictions have imposed the mandate to central banks. Therefore, following the same, the mandate for RBI is to maintain prices and financial stability and include macro and microprudential regulation. As a result, RBI went ahead to increase its lending rates at the cost of short-term growth.

View: Central banks have a unique and contrary mandate. They are given the task of managing the financial stability of the country. Then what is added to their plate is to look at the economic growth and they are expected that the country will go in only one direction i.e. grow more. 

But the problem with growth is that we tend to lose sense of reality which leads to speculation and hence a bubble. This is where the central bank gets in a dilema as it will have to choose between ensuring stability and maintaining growth. A problem which faces Indian regulater. 

Read more about: rbi, economy, bank
Story first published: Saturday, June 11, 2011, 9:30 [IST]
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