NEW DELHI: Tensions between the government and outgoing RBI governor D Subbarao came out in the open on Saturday as Prime Minister Manmohan Singh called for “fresh thinking” on macroeconomic policy and suggested the central bank narrow its focus.

The PM on Saturday seemed to throw his weight behind finance minister P Chidambaram who has been insisting that RBI must not interpret its mandate solely in terms of inflation control and needs to be more attentive to the government’s growth priorities.

“I would venture to think the time has come when we should revisit the possibilities and limitations of monetary policy in a globalized economy, in a fiscally constrained economy,” Singh said at a function to release a history of the RBI, where the governor was in audience.

Interestingly, Subbarao used the occasion to stoutly rebut criticism of being insensitive to growth, saying it is “inaccurate and unfair” to contend RBI was “obsessed with inflation, oblivious to growth concerns”.

Taming inflation

Subbarao argued that the RBI was focused on taming inflation precisely because it was bothered about growth. “There is any amount of evidence to show an environment of low and stable inflation is a necessary precondition for sustainable growth,” he said.

While Subbarao called the growth versus inflation debate an “over simplification”, Singh drew on his own experience as RBI governor to stress monetary policy needed to evolve, saying a redefinition of policy goals he initiated in the 80s had proved to be relevant.

Elaborating his thoughts, the PM said, “... macro-economic policy-making, targets and instruments, I think, is another area, where I feel fresh thinking is called for, and I sincerely hope governors of the future, particularly Dr Raghuram Rajan, will attempt to revisit some of these difficult areas."

As slipping growth accentuated the government’s political problems over the last year, the finance ministry and the RBI have found themselves increasingly at odds as the ruling coalition looked to the central bank to reduce interest rates to provide a fillip to investment.

Subbarao, who demits office on September 4, said the view that governments are for growth and central banks are for price stability is a simplification and while he has said so earlier as well, it was significant that he chose to make the point again in the presence of the PM at Saturday’s function.

