In a country like India, you can't look at just inflation; you have to worry about growth, development and financial stability.
A collection of scholarly thoughts from central bankers, policy-makers, market participants and academic scholars on crisis-related research post the financial meltdown of 2008, Challenges to Central Banking in the Context of the Financial Crisis” (Academic Foundation), compiled by S. Gokam, is based on the international research conference hosted by the Reserve Bank of India in Mumbai as part of its Platinum Jubilee year. Focussed on monetary policy, the debt crisis, exchange rate policies, financial stability imperatives and regulation, the international financial framework, exit policy and asset price bubbles, the four technical sessions and the two panel discussions have all been brought together in this book. The RBI Governor, Dr D. Subbarao, said that a lesson from the crisis was that pure inflation-targeting doesn't work because price stability, though crucial, doesn't always guarantee financial stability. He backed this contention stating that from quarter to quarter, the RBI shifts relative stress across three variables — price stability, financial stability and growth.
MULTI-SERVICE MANDATE
When Prof Easwar S. Prasad of Cornell University said, “We must be targeting inflation, because that way we will be transparent and we will hold ourselves accountable to a defined outcome,” the RBI chief remarked in response, “In a country like India, you can't look at just inflation, but you have to worry about growth, development and financial stability concerns.” This highlights the ‘multi-service' mandate of the RBI which is not only a supervisor but also a regulator and manager of the Government's mammoth debt programme. A valuable vignette from Promontory Financial Group (UK) Ltd Chairman, Mr Michael Foot, who chaired one of the sessions, was his inspirational idea from his former colleague of Bank of England, Mr Eddie George. He said the terms of any bank rescue that involved the central bank should be “as penal as we can make them without precipitating the collapse we are trying to avoid.” Interestingly, even as financial innovations clearly led to the crisis, with excesses in an interconnected financial system generally being unnoticed, the risk of inordinate regulatory response to the crisis-stifling innovation was also expressed as a general concern. The IMF, which spearheaded the crises-related bailout plans of sovereign countries, highlighted this when its Deputy Managing Director, John Lipsky, cautioned that without a renewed bid to foster financial innovation in the global economy, all countries, including emerging market economies, would perform below potential.
MONETARY POLICY
These deliberations clearly demonstrated that there was no consensus on the role of monetary policy in directly doing something about asset prices. Monetary policy generally works better when financial markets function properly. Bank of France Governor, Christian Noyer, turned the focus on the second pillar of strategy by examining credit and monetary developments. This isn't merely because they are key determinants of long-term inflation but as they, in a sense, exemplify financial imbalances. Interestingly, the lender-of-last-resort (LOLR) role of the central bank and regulations were generally seen as prudential tools to safeguard financial stability, although it is an insufficient tool. The Executive Vice-President of the Federal Reserve Bank of San Francisco, John C Williams, argued that issues of insolvency cannot be solved by central bank liquidity policies which are properly in the domain of the fiscal authority. The book is, in sum, a riveting read that throws new light on the financial crisis to help countries be forewarned and forearmed if another one rears its head.
HBL
