"No trade-off between inflation and growth"
OUR BUREAU
HYDERABAD, Dec 28: There can be no trade-off between growth and inflation-control objectives of any economy. An such a resolve calls for the central banks of such economies to find out a rate of inflation consistent with the optimal growth rate, according to Reserve Bank of India executive director A Vasudevan.
Studies done at the central bank have shown that inflation rates beyond 6 per cent would be sub-optimal even with increased growth rates through higher productivity, while money supply growth of less than 15 per cent is preferable to keep demand for money steady in India, he said.
The senior RBI official was delivering the CN Vakil memorial lecture on Analytical Issues in Monetary Policy in Transition at the 80th Annual Conference of the Indian Economic Association (IEA), here.
Though further research and empirical refinements in this area are required to enable one to form more definitive views on the subject, the central banks nevertheless have to be alert to market developments in order to fashion policies that are well understood by market participants and maintain the soundness of the financial system by covering and eliminating uncertainities, Vasudevan felt. Short-term finance or refinance to commercial banks against government securities may be one way to correct the imperfections in interest rates but as a general practice central banks have not been intervening directly.
However, it would be worth considering if the Indian law permits, for the RBI to issue its own short-term paper and trade in it, Vasudevan opined. This is not pursued in view of its possible effects on the credibility for the institution when confronted with the problem of compromising the role of debt issuer and manager with threat of the regulator of liquidity, he felt.
Considering monitoring market rates gains significance in an economy in transition from a regimented regime, it becomes essential for the central bank to monitor information on the liquidity in the economy and financial intermediation for adjusting disturbances in money demand.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
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