The RBI Governor has eloquently summed up the current monetary challenges facing the country and the world (refer your editorial ‘Monetary policy challenges’ August 3). His Tata Memorial Lecture ranks among the best we have heard over the years from various governors of the Indian central bank. One sentence caught my attention: “Creation of high power money in the face of large fiscal deficits, even if there is no direct primary financing, is not costless; it can sow the seeds of the next inflationary cycle.” This is closest to admitting that the buy-back open market operations, in which the RBI is engaged to help banks subscribe to new issues of government, is monetary financing of fiscal deficit. Like a coy maiden married to the finance ministry, the central bank has kept silent till now on the controversy about the statement of the latter that it was not monetising the deficit.
The RBI Governor says that “the challenge for the Reserve Bank is to maintain a comfortable liquidity situation while at the same time anchoring inflation expectations”. But then raising the money supply growth projection to 18 per cent from 17 per cent on the ground of facilitating government borrowing is not the way to anchor inflation expectations. It is in line with the planners’ tactic of moving the goal posts so that targets reach achievements! The Governor is against inflation-targeting for the right reasons. But every time the Bank announces its annual policy it indicates that, in projecting the money supply growth, it is providing for an inflation of 4 -5 per cent! Is it not inflation-targeting though informal means? No one says that the policy should aim at zero inflation.
But to aim at price stability and then fail due to extraneous circumstances beyond the control of the Central bank is one thing. But to build in a 4-5 per cent inflation in money supply expansion only assures the nation of a minimum price rise of that order! The central bank is mandated to maintain monetary stability under the Preamble to the RBI Act. It means the maintenance of the purchasing power of the rupee, another expression for price stability. Over the last two decades, it has been misinterpreted by both the government and the central bank to mean the stability of the inflation rate.
A Seshan, on email
