 "Credible fiscal consolidation plans required: RBI")
"Among the prominent post-crisis challenges is the need to insulate the financial sector from negative feedback from sovereign debt-related concerns, as also to minimise the fiscal burden on monetary policy. With the inability of governments to stabilise debt levels or even finance deficits at reasonable interest rates, monetary policy is confronting a new phase of fiscal dominance," the report on currency and finance 2009-12, released today, said.
According to the report, some valuable lessons for fiscal-monetary coordination have emerged from the recent crisis. The crisis highlighted the inadequacy of macroeconomic stability in ensuring financial stability. Financial stability has, therefore, emerged as a separate policy objective, besides growth and price stability for central banks. The report also points out that effective fiscal-monetary coordination in managing sterilisation issues during the high capital flow regime of the early 2000s and liquidity problems during the crisis period have had a significant impact on RBI's balance sheet. Such fiscal-monetary cooperation in a framework, where central bank autonomy is not compromised is desirable, particularly in increasing the strength and credibility of the central bank balance sheet.
"In light of the increasing valuation and systemic risks in today's market-oriented and globalised environment, there is a need to further strengthen the balance sheet of RBI," the report added.
With inflation showing signs of moderation and the output gap remaining negative, the need to stimulate investment as a means to revert to the trend rate of growth of the economy is pressing.
The revival of investment depends on various structural factors, as well as interest rates. In this context, an orderly and qualitative fiscal adjustment process would not only facilitate the 12th Plan growth objective but provide more headroom to monetary policy to address macroeconomic and financial stability objectives, the report said.
According to the report, keeping in view the emerging economic situation and the lessons of the global financial crisis, the institutional arrangements for government debt management in India over the medium term would require continued involvement of the central bank, coupled with more intensive coordination with the government.
The report noted that careful calibration towards reverting to fiscal consolidation and proper assessment of any likely institutional changes in public debt management constituted key imperatives for the outlook of fiscal-monetary debt management coordination.
Besides, the report said the persistence of very large borrowings by the government has significant macroeconomic, monetary and financial stability implications �" areas where the central bank has an undeniably important, if not unique, role to play.
"The debt management of all the state governments casts an added and distinct dimension to the issue. Against this backdrop, there is a need to review the content and pace of the proposed shift of the debt management function from the central bank to the government," said the report.