With India in the midst of elections and the likelihood of a new government within next two months, former United States Federal Reserve chairman Ben S Bernanke’s advice to the next government was to keep the central bank truly independent.
In conversation with Uday Kotak, executive vice-chairman and managing director, Kotak Mahindra Bank, the former Fed Reserve chairman, at the bank’s annual event Kotak Presidium said, “I am sure he (Reserve Bank of India Governor Raghuram Rajan) will maintain — the most important thing a central banker can maintain — an independent policy.”
Describing Rajan as a long-time colleague and an outstanding economist, Bernanke, who retired January-end this year confessed he did not know much about Indian politics. He, however, said, “In a mature economy like India’s, which is becoming modern and a financially-oriented economy, an independent central bank, responsible central bank is really central to success.” The former Fed Reserve chairman was responding to Kotak, who sought his advice, pointing to the fact that India was in the midst of elections and could see a new government in June. Kotak asked Bernanke to share how he had managed two US presidents — President George Bush and President Barack Obama, during his tenure.
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“In United States, we were lucky — President Clinton, who you said was here last year, was a great defender of central bank dependence as was President Bush who appointed me and President Obama who reappointed me. They were always very careful to say that the monetary policy was not their responsibility and that independence, it was real, and not just verbal, is very important,” Bernanke said.
When asked about his views on inflation targeting, and the debate whether this should be a single point mandate for a central bank, Bernanke said he has been very supportive of inflation targeting even before he became the Fed Reserve chairman. “The reason for that though is not necessarily the same as in the other context, which is that monetary policy benefits from clarity and transparency. And it really helps to let people know what you are trying to achieve, particularly in countries where inflation has been high.”
“Setting a target, even if it’s a higher target which comes down over a period of time, is useful because it tells market what to expect and probably helps the process of bringing inflation down. It’s not inflation per se, but transparency and the need for the central bank to explain what it is doing is intrinsic part of inflation targeting,” said Bernanke. This, however, did not mean that the central bank ignores everything else.