Mumbai: Amid rising inflation, Reserve Bank Governor D Subbarao on Friday pitched for greater autonomy for the central bank saying that operational freedom would help it focus better on management of prices.
"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 in a speech at the SAARC Finance Governors' symposium at Kumarakom in Kerala.
Monetary policy typically acts with a lag, and price stability therefore has to be viewed in a medium term perspective, he added.
Subbarao, in May, had also made a strong case for "legally-backed formal autonomy" for the RBI.
The Reserve Bank, he had said at Central Bank Governance Group in Basel, Switzerland, "should be given legally-backed, formal autonomy" as a pre-condition for setting up a Monetary Policy Committee (MPC) to advise the RBI.
The autonomy, according to Subbarao, would help the central bank focus on the medium term objective of lowering inflation without bothering about the short-term compulsions. Despite the RBI's hawkish monetary policy stance, the
rate of price rise has remained at an elevated level.
Food inflation jumped to a two-month high of 9.01 per cent for the week ended May 28 on the back of costlier fruits, onions and protein-based items. Besides, headline inflation stood at 8.66 per cent in April.
The central bank has raised its key lending (repo) and borrowing (reverse repo) rates nine times since March 2010 to rein in the price rise. In May, it raised short term lending rate and savings bank rates by 50 basis points to check high inflation.
"Even as the importance of central bank autonomy in monetary policy is now broadly accepted, there is a growing view that central bank decision making has to become transparent and that central bankers have to be more accountable for the outcomes of their decisions," Subbarao said.
The standard argument for the central bank's autonomy is that it enhances the credibility of its inflation management credentials, he added.
Subbarao also noted, however, that the much prized autonomy of central banks has come under assault post the global financial crisis, with an influential view gaining ground that one of the principal causes of the crisis was the unbridled autonomy of central banks.
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