RBI priority should be liquidity control, says Rangarajan

RBI priority should be liquidity control, says Rangarajan
The Financial Express, December 9, 2009, Page 13

fe Bureau, Mumbai

Prime Minister's Economic Advisory Council (PMEAC) chairman C Rangarajan said the Reserve Bank of India's (RBI) priority should be to control liquidity and only then will the apex bank be able to monitor the movement of key interest rates.

"The first act of the RBI should be to focus on liquidity and then, after looking at the behaviour of the prices, only should RBI look at tweaking the key interest rates,'' he said. On the RBI's reported plan to go for further buying of gold, Rangarajan said it is very difficult to say what will be enough. "But what one can say is, because the foreign exchange reserves are increasing and the stocks of gold remain at the same level, the proportion of total reserves of gold has come down. To some extent it can be corrected and brought back to the old level," said Rangarajan.

On a query about RBI's exit strategy from its expansionary monetary policy, Rangarajan said that the decision will have to be taken after looking at the behaviour of prices in December.

Earlier participating in a round table conference, Rangarajan advocated the need for an independent banking regulator in the country.

Also, commenting on the need for a single or more regulators in India, he said, "If you look at the current financial crisis, there is no unique answer thrown up by the crisis. The UK had a single regulator and it had problems. The United States has multiple regulators even on one segment of the financial system that also failed. Each country will have to decide against its own historical background what works and perhaps that is the most important thing." As far as issues concerning banking regulations, markets and India, the RBI has been looking at banking regulations. "For a conceivable period of time, the RBI can continue to do it, even though I don't eventually rule out the possibility of an independent banking regulator also," he added.

He said that the central bank of the country not only in India but elsewhere needs to monitor the banking and the financing system.

"Therefore, you cannot say that the central bank of the country should do everything. I would say that in the historical context, the central bank of the country may look at the banking regulations also. However, eventually separating it is not something that can be ruled out," he added.

Rangarajan further said the capital inflows are generally welcome, particularly in a developing country. But distinction has to be made between one type of capital flow to another type of capital flow in terms of foreign direct investment except when it goes to speculative activities like real estate. But as far as the foreign institutional inflows are concerned, they could create a situation in the crop prices begin to rise to a very large extent. "Therefore to some extent, some restrictions on the capital flows maybe imposed but I do not generally think that Tobin tax is the most ideal way of doing it," he added.

Rangarajan said that even taking into account what has happened in the last nine months, the total addition to the reserves after valuation change will not be more than $ 30 billion in the current year and that is manageable and that can be absorbed. Bimal Jalan, another former RBI governor said, "I am not in favour of capital controls per se except as a temporary thing. My take on it is that capital control in principle is the second best or third best solution. Why is money not flowing into the banks, why is it going to mutual funds?," he added. YV Reddy hinted that the threat for asset price inflation in India is serious in future. "However, it's contingent upon the way the capital flows and domestic liquidity are managed," he added.