03 August 2015 11:20:10 IST

Monetary policy transmission slow due to Govt control of PSBs: Y V Reddy

Former RBI Governor Y V Reddy spoke at 21st Biennial Conference of AIEFS in Hyderabad

Monetary policy transmission is limited because of Government control of public sector banks and administered interest rates, according to Dr Y V Reddy, Chairman of the 14th Finance Commission and former Governor, Reserve Bank of India.

He was speaking at the inaugural session of the 21st Biennial Conference of the Association of Indian Economic and Financial Studies (AIEFS) at the School of Economics, University of Hyderabad, on August 3.

Monetary transmission refers to the process by which a central bank’s monetary policy decisions are passed on through the financial markets to businesses and households.

As most of the credit is controlled by the public sector banks, which are operated and managed by the Government through the Ministry of Finance, decisions pertaining to interest rates may not always be driven by the natural impact of the monetary policy mechanism.

INFLATION TARGETING

Referring to inflation targeting, Reddy said: “When I was the Governor of RBI, I subscribed to the view that inflation targeting may not serve any purpose. Inflation targeting is done for core inflation, which excludes food and oil inflation. But in the context of India, food and oil prices are important drivers for inflation.

“Further, as long as there is fiscal deficit, the scope for counter-cyclical measures is minimal,” he added.

In his welcome remarks, Debashis Acharya, Professor, School of Economics, UoH and Coordinator for the conference, said it was only the third time that the two-day conference was being held in India.

Founded in 1975 at Bloomsburg State University, Pennsylvania, AIEFS is a non-profit academic organisation of economists who felt a need to develop an identity for those involved in scholarly research on Indian economic and financial issues.

It aims to encourage inquiry into and analysis of the problems and issues facing the Indian economy.