CNBC-TV18 is completing 20 years this year. In the past 20 years, it has been narrating the story of the rise and rise of the Indian economy, the ups and downs in corporate governance and performance, the aggressive growth of the banking sector and the worries of non-performing assets. To mark the occasion, a new series, House of Policy, has been launched where it will get 20 doyens of policy making to analyse the highlights, the hits and the misses of India in various aspects.
To kick-start the series, CNBC-TV18's Latha Venkatesh spoke with the doyen of central banking, former RBI governor C Rangarajan.
Rangarajan said the central bank underwent a significant change in terms of the institutional framework in which it was operating. "In the early 1990s, after the liberalisation programme was launched the Cash Reserve Ratio was slashed, the statutory liquidity ratio was reduced from 38.50 percent to 25 percent, more importantly the administered structure of interest rate was abandoned and the government was forced to go to the market and borrow at market-determined rates of interest. This has important implications for the central bank, because of this the open market operations became possible as an instrument of credit control. Also the bank rate initially and later the repro rate could become a policy instrument because of this change," he noted.
The former RBI governor pointed out that the foreign exchange market came into active operation because of the switch to a market-determined exchange rate system in the early 1993. So, the relationship between the foreign exchange market and the domestic money market became intense and as a consequence the monetary policy issues were also related to what is happening to the exchange rate and what is happening in the rest of the world.
On inflation targeting, he said, "Even though they said multiple indicators and so on, what essentially mattered was that both growth and inflation were always their consideration, whether you look at it in the early 1990s or a little later, the point of view was always that inflation is not something that can be separated from what is happening to economic growth. Even in the latest 2016 change, it always says inflation targeting in the context of growth. I think inflation adjustments or inflation control cannot be made without looking at what is happening to economic growth. What is happening now is the dominant objective of the RBI is price stability. But that has to be done in the context of what is happening to economic growth. Just look at the minutes of the monetary policy committee. There is a great of discussion about what is going to happen to economic growth and what are the factors that might actually have an impact on price levels. Therefore, I think we should not draw too strong a distinction between the two."