RBIs turf wars

RBI Governor D. Subbarao has,for the first time,explicitly and openly spoken against the government setting up its own Debt Management Office DMO. The world over when central banks have modernised and moved their focus to monetary policy,they have got rid of conflicting objectives and additional responsibilities. And the government has proposed to set up its own DMO which would minimise the cost of its borrowing,go about it professionally,and do so without forcing banks to buy government securities in the statutory liquidity ratio environment. In his budget speech of 2011-12 the finance minister announced that it would be accomplished this year. Yet it seems the RBI would like to retain this job,regardless of whether this is the best allocation of responsibilities for the country or not.

This is especially disturbing in the present context. In the most recent credit policy,Subbarao had indicated that the RBI would conduct monetary policy with a focus on controlling inflation. The difficulty with the RBIs present framework is that there are conflicting objectives. So,should interest rates be raised with a view to having an impact of monetary policy on inflation when the government has large borrowings and an increase would raise interest expenditure of the government? The moment the RBI says that it opposes setting up an independent DMO,it says more about the RBIs priorities than raising the repo rate by 50 basis points does. It indicates that inflation control is not its top priority. In this scenario,it will be difficult for the RBI to change the public perception,as it tried to do with the credit policy announcement and the hawkish tone of the governors speech.

He suggested there should be a monetary policy committee structure and the RBI should have autonomy. In other countries,when this is so,it is part of giving the central bank a clear single mandate,often inflation-targeting,and then making it accountable for that mandate. Without accepting accountability,the RBI cannot realistically expect to be given autonomy. A public institution should be responsible to the people of India. A clear framework in which this system of accountability will work can pave the way for greater autonomy. However,today,the RBI has,barely a few days after its hawkish credit policy,quickly backed away from accepting responsibility for inflation and is back to fighting turf wars on the DMO. It is a pity,and it will unfortunately take credibility away from the RBIs credit policy announcements. A monetary policy committee cannot compensate for lack of credibility.