Greater need to ensure autonomy to central banks – RBI

Monday, 13 June 2011 00:00 - - {{hitsCtrl.values.hits}}

(Reuters): With central banks assuming increasing responsibility for financial stability, there is a greater need and urgency to ensure their autonomy, the Reserve Bank of India’s governor said on Friday.

The RBI is not constitutionally independent and the government has the power to direct it, and also appoints the central bank’s governor and four deputies.

“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,” Duvvuri Subbarao said in a speech at the SAARC Finance Governors’ symposium in Kumarakom.

Though many central banks do not have an explicit mandate for financial stability, post crisis in 2008, several jurisdictions are vesting this as a formal mandate to central banks, Subbarao said.

The RBI’s mandate is to maintain prices and financial stability and includes macro and microprudential regulation.

Preserving financial stability requires coordination among regulators, and between regulators and governments, he said.

“...it is generally acknowledged that these coordination mechanisms, especially as between the government and the regulators, must function in ways that do not compromise the autonomy of the regulators.”

The RBI raised interest rates more than expected last month and vowed to battle price pressures even at the cost of sacrificing short-term growth, even as the government counts on strong growth for the current fiscal year to help fund increased social spending and keep the fiscal deficit in check.

“Having autonomy frees the central bank from the pressure of responding to short-term developments, deviating from its inflation target and thereby compromising its medium term inflation goals,” Subbarao said.