RBI can not be inflation targeter: Subbarao
He also maintained that central bank, which hiked policy rates a record 13 times last year to tackle inflation, cannot pursue a policy completely oblivious to growth. Subbarao, however, said that in the past 60 years no government was insensitive to inflation, and inflation management usually takes precedence over growth concerns.
RBI had come under criticism in the last one-and-a-half years for aggressive monetary stance on inflation. But the Governor pointed out that without the complementary effort to overcome supply side constraints, monetary policy would not be effective to check the price rise. "If supply side constraints affecting inflation are not managed, is it realistic to expect RBI to contain inflation?" Subbarao asked, and added that the central bank too was confused as to which index of inflation should be targeted as there are many indices.
About the rising government borrowing, Subbarao said it may not be possible for the monetary policy to remain "indifferent" to government borrowing programmes. "In a country like ours where fiscal deficit is high and is likely to be high, no matter what we might wish, when the government borrowing is such a large part of the total credit outflow, can the central bank realistically remain indifferent to the government borrowing?"
On the issue of financial stability and central bank`s responsibility to maintain it, the Governor said the RBI is seeking an explicit definition on the same, and maintaining stability is not exclusive domain of the Bank. "I believe there will be a greater clarity if explicitly it is mentioned that the Reserve Bank has a responsibility for financial stability," the Governor said, adding the central bank has made a request to the Financial Sector Legislative Reforms Commission in this regard.
About exchange rate management strategy, Subbarao said bank should have a stable strategic policy along with a tactical one to check volatility in foreign exchange rate. "You must distinguish between your strategic policy and tactical policy. Strategically, you clearly lay out your policy, communicate your policy, keep that policy stable over time. Tactically, be unpredictable, try to play the market just like other people are playing the market and that`s how a central bank can be effective."