When I first joined the Reserve Bank, I was given a three year term and I always wondered if I will last that long. I asked my then Governor Bimal Jalan, ?How often can you think about interest rates and discuss them?? But today I know, not only can one discuss interest rates forever, but can also write pages and pages, and still not know if enough has been said.? A startling admission by Rakesh Mohan, Deputy Governor, RBI whose new book Monetary Policy in a Globalized Economy, contains many of those pages.
The essays are written at different points in time, but tell a connected story. The book revolves around two sets of issues ? banking sector reforms and monetary policies ? two interlinked fundamentals for any economy. It focusses on the manner in which financial sector reforms are introduced and have a salutary affect of bringing about changes, without disruption. Also how in the globalised set up, for monetary policy making it is no longer possible to ignore what is happening in the rest of the world.
Mohan shares how measures of financial stability have been important in Indian monetary policy making. ?Stability as an objective comes naturally to us; it?s a part of our environment,? he says. ?All of us in policy making in India have automatically been geared towards insuring stability. Since the early 1980s at least 100 countries, including most advanced countries, have gone through a banking crisis. Owing to the major financial sector reforms, major monetary sector reforms, major policy reforms, India has not had any. We have also been exceptional since we have regarded banking regulating supervisions as an intrinsic part of our monetary policy making.?
He affirms that when most around the world were moving towards extremes ? either by fixed and controlled measures or by no controls, RBI took the middle way. ?We also used potential instruments that dampened credit growth occasionally, that were not generally approved in the banking circles around the world and were considered orthodox measures. But now these measures have been brought back to the tool kit by different central banks across the world today.?
The ongoing financial crisis, he reasons, is testing the policy making powers of the central banks as never before. ?Innovation is the order of the day and innovations and new procedures are being followed by central banks, miraculously within their frameworks. Despite the fact there have not been amendments governing the central banks, they have done tremendous amount of innovation in these six months to respond to the crisis. If central banks along with their respective governments pass this test, without sinking into a depression ? then we would have won the hour of responsive policy making and this will be something remarkable that the world will witness.? He believes that active liquidity management is a key element of the current monetary policy stance. In view of heightened uncertainty, volatility in global markets, and the dangers of potential spillovers to domestic equity and currency markets, liquidity management will continue to receive priority in the hierarchy of policy objectives in the period ahead.
He avers, ?That one of the key aspects that I have learnt in my stint is how central banking keeps changing and how flexible it is, most observers think of central banks as rigid institutions?but this is a wrong image. The vision and working of central banking has been inherently flexible and innovative right through its history. This flexibility of central banking and not just the RBI has been a voyage of discovery for me.?
A voyage he shares skillfully in 500-odd pages.