Tension between fiscal,monetary policies: Warns Subbarao

On financial reforms,he said,“We will not slow down on reforms,but will surely rework the road map to reflect the lessons of the crisis. Preserving and strengthening financial stability is a complex challenge. We need to take measured and timely action,and make a balanced judgement — not to be too benign,but also not go over board with excessive or premature tightening.” “There is a concern in some quarters that the crisis may have dented our enthusiasm for financial sector reforms. I believe that concern is misplaced,” he said.

Unnerved by the scale and sweep of the crisis,governments and central banks around the world responded with an unprecedented show of policy force. Central banks cut policy interest rates and have resorted to injecting massive liquidity in the system through a slew of measures variously called quantitative and credit easing.

Governments stepped in with fiscal stimulus packages raising fiscal deficits to levels not seen before in peace time. According to Subbarao,even as governments and central banks cooperated,the familiar tensions between fiscal and monetary policy have started playing up. It is widely hoped though that once the crisis is behind us,these tensions will melt away and monetary policy will once again be conducted independent of fiscal compulsions. “On he other hand,there are apprehensions that this may not happen soon because of the expected protracted recovery and also because of structural factors that may keep fiscal deficits at elevated levels into the medium term,” the RBI governor said.