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Leaderspeak-discussion: Independent Monetary Policy and a separate Debt Management Policy for India

On 4th July, 2018, the Centre for Corporate Governance and Citizenship at the Indian Institute of Management Bangalore, held a panel discussion on ‘Independent Monetary Policy and a separate Debt Management Policy for India’.  The objective was to discuss whether India needed to formulate an independent Monetary Policy while separating Debt Management from the Reserve Bank of India. The other objective was to further discuss whether this was realistically possible, and study the after – effects, if India did formulate an independent Monetary Policy, and separated debt management from the Central Bank.

Notable speakers:

·         Dr. S.S. Bhalla - Member of the Prime Minister’s Economic Advisory Council

·         Mr. B.K. Bhattacharya - Chief Secretary, Government of Karnataka,

·         Prof. Narendra Pani, - Resident editor of Economic Times and Professor at the National Institute of Advanced Studies.


Key takeaways:

1)      On an Independent Monetary policy:

·         Formulation and implementation of monetary policies is done in an engineering fashion. We assume what exists and it can be erased completely and reconstructed.

·         The idea of an independent monetary policy is possibly flawed. Nothing can be completely independent. There is an interplay of several factors. For example:  The 2008 crisis, which began in the U.S. Banks and ultimately led to impact in India

·         If you change monetary policy, there is impact on rate of interest, consumption, investment and unemployment – all these factors have to be taken into account.   

·         The developed world has established tax systems and a monetary policy. However, India is still a developing country. Applying a rigid regulation will not work. India is moving from informal to the formal sector, agricultural to non- agricultural economy.

·         Even though the government has an inflation target, prepared with tools and remedies in case the target is not reached, these remedies don’t always work.

·         We must make a distinction between autonomy and independence, before we talk about independent monetary policy. We have to move towards a diagnostic mindset, from a traditional/engineering mindset and study the aftermath of each monetary decision made.

2)      On Inflation:

·         India has introduced inflation targeting in 2016, but according to the panellists, it is no longer that important.

·         New Zealand, which started the concept of inflation targeting, has given it up last year.

·         The nature of inflation has changed, but those setting inflation targets believe that inflation has not changed.

·         The panellists did not fully agree with the Keynesian theory, which states that in times of inflation, deficit spending will increase aggregate demand, thus adding to inflationary pressures. The panellists view was that there is no clear relationship between fiscal deficit and inflation.

·         Another impact of inflation is the Ricardian Equivalence proposition, the economic hypothesis that economic agents will gain insight on the rate of consumption required, based on the inflation and the government budget constraints.

·         Another observation is that, world inflation has declined, as oil price has risen up simultaneously.

3)      On Debt Management

·         India is one of the very few countries that has debt management control within the central bank (RBI).

·         There are 14 reports since 1992 to 2016 by the IMF, all of which state that India needs an independent debt management office, separate from               the RBI.

·         Officials who opposed the RBI controlling debt management, are in favour of it, when they become RBI Governors.    

·         Though there is no mathematical formula to decide to the GDP ratio, emerging countries should bring their GDP ratio to 60 per cent to maintain a stable economy.

·         The Government had taken various measures to ensure that debt is sustainable in 1990s, under strict regulations, which is not the case today.

·         Though economists, researchers and the government are aware of the ramifications of accumulating debt, there hasn’t been enough conversation on how it should be reduced.


·         Before any monetary policy is formulated, we should be sensitive to its repercussions.

·         There are several interconnected factors that will be impacted, as a result of any monetary policy.

·         Debt management control cannot be completely independent, as it is interdependent on numerous factors.