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RBI chief makes a case to preserve independence of central banks

His comments come weeks ahead of the RBI's third quarter policy review scheduled for January 29 in which it might go for a cut in interest rates.

twitter-logoPTI | January 4, 2013 | Updated 10:14 IST

Reserve Bank of India Governor D Subbarao on Thursday said there is a need to preserve the independence of central banks as their mandate has expanded in recent times.

"The issue of monetary policy independence has acquired greater potency following the expansion of mandates of central banks and their more explicit pursuit of real sector targets such as growth and unemployment," he said.

Subbarao cited Japan, where there is political pressure on the Bank of Japan to adopt a higher inflation target so as to create more room for growth stimulus, and said the case is "by no means an exception".

His comments come weeks ahead of the RBI's third quarter policy review scheduled for January 29 in which it might go for a cut in interest rates.

Subbarao said government and RBI need to act in harmony as the central banks on their own cannot fix economic woes.

"Central banks cannot fix economies by themselves. Governments need to act too from the fiscal side and monetary and fiscal policies have to act in harmony," Subbarao said.

Welcoming Nobel laureate Joseph Stiglitz at the C D Deshmukh Memorial Lecture, he said the monetary and fiscal policies should "act in harmony" to achieve common goals.

The comment comes in the backdrop of growing instances of apparent divergent views between the RBI and the Finance Ministry on a string of issues, including lowering interest rates and issuance of new bank licences.

The RBI had not lowered interest rates despite nudging to do so by Finance and Commerce Ministries. The central bank did not initiate the process of issuing bank licences despite assurance from Finance Minister P Chidambaram that government would amend the Banking Act in time.

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