In the press conference that he addressed after the release of the third-quarter review of monetary policy, the RBI governor articulated in a clear manner the rationale for his proposals (“An expansionary policy is like chakravyuh”, January 30). However, one statement that he made is disturbing. He said: “We are going to manage the liquidity situation; we are going to calibrate our monetary policy to manage the borrowing in 2010-11.” It means the subordination of monetary policy to the management of public debt. The proposal for a debt management office (DMO) in the government delinking it from RBI is being actively pursued on grounds of the so-called conflict of interest that the latter faces. Now that it is resolved in favour of debt management, there is one more reason as to why the proposal for the new office should be given up.
In fact, throughout its life, the central bank has taken the view that the government should be in charge of the financial resources. During the 1970s, this writer was associated with the credit-planning exercises of RBI at the beginning of the year. After allocating resources to the government, foodgrain procurement and priority sectors, the bank earmarked the balance for what was then called the “residual sector” — residual indeed for an economy with an ambitious programme of industrialisation!
Mercifully, this expression was dropped later. The reported statement of the RBI governor opens up the possibility of yet another debt-management operation masquerading as open-market operation involving the buyback of securities. It will violate the Fiscal Management and Budget Responsibility Act in spirit. Would it not be more transparent if the ban on the initial placement of securities with RBI was lifted?
A Seshan, on email
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