Reserve Bank Governor D Subbarao said today coordination between monetary and fiscal policies has become a challenge even as the financial crisis has raised questions about the role of central banks.
"The first challenge going forward is to manage the coordination between monetary and fiscal policy, not only in India but around the world," Subbarao said at a seminar, adding that the monetary policy has become the first line of defence.
"The second challenge is defining the mandate of central banks and reforming the regulatory architecture," he added.
In the midst of the crisis, central bank governors have become unlikely heroes, "some of them have rock star status", as they are seen as part of the solution, he said.
However, Subbarao added, some people are asking whether the central banks are part of the problem and say the central banks are also villains.
The questions that are now being raised include was the mandate of the central bank clearly defined, were there flaws in the accountability mechanisms, did the objective of financial stability fall through the cracks, Subbarao said.
"... You can't define it (financial stability). It's like pornography, you can't define it but when you see you know it," he said, adding that the central banks and governments have become increasingly dependent on each other.
