Reserve Bank of India (RBI) governor Duvvuri Subbarao on Thursday said that central banks need to be independent to make monetary policy decisions.
Subbarao was speaking at a memorial event for RBI’s first governor CD Deshmukh.
His remarks come at a time when the RBI is under immense pressure from the government to cut interest rates.
However, the central bank has stood its ground, keeping rates on hold since April despite the government pressure, as subbarao has repeatedly reiterated his concerns about inflationary pressures. He only changed his stance in October when he announced a “reasonable likelihood” of monetary policy easing in the January-March quarter with inflationary pressures expected to ease.
“The issue of monetary policy independence has acquired greater potency following the expansion of the mandates of central banks and their more explicit pursuit of real sector targets such as growth and unemployment,” said Subbarao.
He also cited Japan as an example of how a government can put at risk the independence of a central bank. “In recent weeks we have all seen this issue of central bank independence play out in Japan with political pressures on the Bank of Japan to adopt a higher inflation target so as to create more room for growth stimulus,” said Subbarao. “The example of Japan is recent and high profile, but by no means an exception.”