Reserve Bank Governor D Subbarao today said sovereign debt is primarily a political issue and not that of the central bank whose remit is to ensure price and financial stability in the economy.
"Sovereign debt sustainability is not like price stability. It is a political issue. How much debt the government raises and how they raise that debt, are a political issue and once central bank starts entering into that area, there is a risk not only that they might fail, but also crossing that line between apolitical central bank and a political function of raising debt," Subbarao said.
He was speaking at the ninth convocation ceremony of the Indira Gandhi Institute for Development Research here.
Talking in the context of the lingering European sovereign debt crisis, he said the European Central Bank (ECB) is now asked to go beyond its usual mandate of maintaining price stability and financial stability.
"Now, the ECB has been told that you must bend and stretch your mandate...Not only to look after price stability, not only to look after financial stability, but also it must be mindful of the sovereign debt concerns," he noted.
The governor also said the role of central banks has become challenging in the last 18 months due to the ongoing debt crisis in Europe.
"There is big enough challenge for central banks to balance price stability, growth and financial stability. This challenge becomes bigger because of sovereign debt crisis in Europe," Subbarao said.
The 17-nation Eurozone is currently reeling under sovereign debt crisis, with many of the nation countries having more than 100 percent debt to GDP.
While some of the countries like Greece are at the verge of a sovereign debt default due to lack of a political consensus within the member-states to provide a big enough rescue fund, the ECB is being asked to go beyond its usual mandate and work towards sovereign debt sustainability.
