The Wood and Some Trees

Issues on money, banking and finance have been engaging our attention both at a sublime level and at a mundane plane. In monetary policy, questions are being raised about the efficacy of inflation targeting regimes and the nature of Indian inflation. Insofar as banking policies are concerned, the policymakers are grappling with resolving the problem of non-performing assets (NPAs) of the Indian banking sector. Coming to project financing, the development of the corporate debt market has still much to be desired. This year’s special issue of Money, Banking and Finance offers a diverse bouquet of papers delving into both the broad picture and some specific issues.

C Rangarajan in his paper, “Evolving Contours of Monetary Policy” (p 34), has looked into various nuances of monetary policy in terms of an evolutionary journey with strokes of a broad brush. Insofar as the political economy of monetary policy is concerned, he notes that Jawaharlal Nehru’s letter to Reserve Bank of India (RBI) Governor Rama Rau, while accepting his resignation, clearly indicated that the government was the dominant partner and that the role of the RBI was to abide by the larger concerns of the government. While this approach did not create any problem as long as inflation was moderate, in the 1970s, with inflation touching very high levels, excessive monetary expansion came to the forefront. Later, the 1980s witnessed a “continuous ‘battle’ between the RBI and the Ministry of Finance on the control of inflation and the need to contain fiscal deficit and more particularly its monetisation.” While emphasising the need to regulate money supply consistent with real GDP growth and inflation, the Chakravarty Committee (1985) focused on the need for close coordination between monetary policy and fiscal policy and recommended adopting flexible monetary targeting. Nevertheless, even with the adoption of monetary targeting, the latter part of the 1980s still saw a higher fiscal deficit and higher money supply growth, leading to the crisis of 1991. While post 1997, the RBI adopted the multiple indicators approach, the RBI moved to a new monetary policy framework of flexible inflation targeting (FIT) in 2016. The new regime aimed at anchoring the operating target, the weighted average call rate, around the repo rate. Against this evolutionary journey, Rangarajan raises several issues like threshold level of inflation; possible conflict of the flexible inflation target with other objectives; RBI’s ability to control inflation; or transmission mechanism. In this paper, Rangarajan focused his attention further on a diverse set of topics on monetary policy, such as the role of money, exchange rate stability, and financial stability. While commenting that “a spirit of dialogue and accommodation must prevail” on central bank autonomy, Rangarajan, in his concluding observations, notes, “Successful central banks are those which respond to problems with speed, tact and intelligence.”