RBI chief stresses need for independence in monetary policy

MUMBAI Thu Jan 3, 2013 6:42pm IST

Duvvuri Subbarao, governor of the Reserve Bank of India speaks during an interview with Reuters at a hotel in Mexico City November 5, 2012. REUTERS/Henry Romero/Files

Duvvuri Subbarao, governor of the Reserve Bank of India speaks during an interview with Reuters at a hotel in Mexico City November 5, 2012.

Credit: Reuters/Henry Romero/Files

MUMBAI (Reuters) - The Reserve Bank of India Governor Duvvuri Subbarao said on Thursday central banks need to be independent to make monetary policy decisions during a speech at a memorial event for the country's first Indian central bank governor.

The remarks come at a time when Subbarao is under immense pressure from the government to cut interest rates.

However, the Indian central bank has stood its ground, keeping rates on hold since April despite the government pressure, as the RBI governor has repeatedly reiterated his concerns about inflationary pressures.

Subbarao only changed his stance in October, when he announced a "reasonable likelihood" of monetary policy easing in the January-March quarter as inflationary pressures are expected to ease.

"The issue of monetary policy independence has acquired greater potency following the expansion of the mandates of central banks and their more explicit pursuit of real sector targets such as growth and unemployment," Subbarao said in a speech on Thursday.

The governor was speaking at a memorial event for C.D. Deshmukh, the RBI's first Indian governor.

Subbarao also cited Japan as an example of how a government can put at risk the independence of a central bank.

Recently-elected Japanese Prime Minister Shinzo Abe has kept up pressure on the Bank of Japan to step up its monetary stimulus, even after the central bank loosened policy in December for the third time in four months.

Abe has also threatened to change the law that guarantees the central bank's independence if the BOJ does not pursue more aggressive easing and has called for the inflation target to be doubled to 2 percent.

"In recent weeks, we have all seen this issue of central bank independence play out in Japan, with political pressures on the Bank of Japan to adopt a higher inflation target so as to create more room for growth stimulus," Subbarao said.

"The example of Japan is recent and high profile, but by no means an exception."

Subbarao also reiterated on Thursday that the central banks alone cannot solve all problems, and urged for better fiscal policies to inspire trust and confidence in investors.

India's growth is set to fall to a decade low of around 5.5-5.7 percent in 2012-13, and the government is under pressure to contain its fiscal deficit at 5.3 percent to avert potential downgrades to the country's sovereign ratings.

"Central banks cannot fix economies by themselves. Governments need to act too from the fiscal side, and monetary and fiscal policies have to act in harmony," he said.

(Reporting by Neha Dasgupta and Shamik Paul; Editing by Rafael Nam)

FILED UNDER:

Reuters Showcase

GDP Growth

GDP Growth

India revises up 2013/14 GDP growth to 6.9 percent.  Full Article 

Adani Restructuring

Adani Restructuring

Adani hives off power, ports businesses to boost growth.  Full Article 

Bank of Baroda

Bank of Baroda

Q3 net profit down 69 pct on higher provisions  Full Article 

Trading Fees

Trading Fees

BSE slashes fees in FX derivatives battle with NSE  Full Article 

SpiceJet Turnaround

SpiceJet Turnaround

SpiceJet board approves up to $243 mln share sale plan  Full Article 

Currency Market

Currency Market

RBI urges companies to hedge FX exposure  Full Article 

Banking Sector

Banking Sector

Banks say no room to cut lending rates, thwarting RBI easing  Full Article 

ICICI Results

ICICI Results

ICICI sets quarterly record profit as Q3 net rises 14 pct  Full Article 

Reuters Poll

Reuters Poll

RBI seen holding rates steady on Tuesday, minority of analysts expect cut  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage