HomeContact Site map   Google    www    iipm think tank
   
   
Home Scrutiny Publications Under Cover Mus'ings  
 

Home > Scrutiny > A tale of two power centres

  
   
     
   Case Studies  
       
  Marketing    
  Human Resource    
  Information Technology    
  Finance    
  Strategy    
       
 
     
   Industries  
       
  Steel    
  Glass    
  Banking    
  Prophylactic    
  Auto    
  Hospitality    
  Energy    
       
 
     
   Other links  
       
  IIPM    
  Planman Consulting    
  Planman Marcom    
  Planman Technologies    
  Daily Indian Media    
  Planman Financial    
  4P's Business and Marketing    
  Business and Economy    
  The Daily Indian    
  The Sunday Indian    
  Arindam Chaudhuri    
  GIDF    
       
 
  
         
Scrutiny
  
A tale of two power centres
Worldwide, the headquarters of Central Banks are located in the political capital of the country. It’s time for India to consider the same for the RBI
24/11/2011

The Central Bank plays a crucial role in the overall economic policy making of a nation. A Central Bank traditionally oversees and regulates monetary policies like interest rates and inflation, making it one of the most powerful economic institutions that a country possesses. This responsibility of regulation of the value of money is bestowed upon it by the Union government. The responsibilities subsume printing of paper notes, being a banker for government as well as private banks, and functioning as a lender. Price maintenance and financial system stability are also under the purview of the Central Bank. As against monetary policies, fiscal policies are controlled by the union governments as they deem fit for the nation’s economy. But monetary and fiscal policies have to work in tandem with each other, and a high level of synergy and coordination is required to maintain a healthy state of the economy and achieve critical goals.

Certain issues like revenue generation, expenditure adjustment, decline in fiscal deficit and fiscal & monetary policy synergy are a must to enhance the effectiveness of monetary policies. Reserve Bank governor D. Subbarao had pointed to this when he said, “The challenge going forward is to manage the coordination between monetary and fiscal policy, not only in India but around the world.”

In India, despite the incredible developments in mobility and communication over the last two decades, fiscal policy is controlled by the Ministry of Finance located in Delhi and monetary policy is formulated by the RBI located in Mumbai. In such a scenario, a lack of coordination and miscommunication is quite expected. Pranab Mukherjee also touched upon the issue recently when he commented, “The present global economic developments and more particularly the sovereign debt crisis of Europe have once again brought into focus the need for better coordination between monetary and fiscal policies.’ One of the most virulent problems that a common man faces today is uncontrolled inflation – which can be checked by such improved coordination. If the two headquarters regulating these two aspects are 1,000 miles apart, it will not help! The distance certainly hampers better information sharing, joint meetings, brainstorming and coordination.

Also, most of the countries worldwide have their Central Bank headquarters in the political capital and not in the financial capital. It is true for not only small countries with one metropolitan city (most European countries) but also for large countries. While in the US, the Central Bank is located in Washington D.C., it is located in Ottawa in Canada, in Brasillia for Brazil and in Beijing for China. When the US policy makers need to take a decision that has wide ranging economic implications, it has federal bankers at its disposal for detailed deliberations at most times. Coordination between the US Secretary of Treasury, Federal Reserve and Federal Insurance Corp. was quite legendary in the recent bailouts of Wall Street banks.
However there is a flip side to it. The Ministry of Finance can try to dominate the Reserve Bank with all the powers vested in its control. Differences between the two were a subject of discussion with respect to minimum capital requirements and FDI limits in the new private banks. Since policies backed by political will can often differ in intent from what is desired, sovereignty of central banks from the polity of the day is imperative. However, this issue can still be managed with proper guidelines and code of conduct even if the RBI shifts to New Delhi.

In the same vein, the government needs to also consider shifting National Stock Exchange (NSE) to New Delhi. Given the fact that North India, especially in and around Delhi, is experiencing a huge surge in investment and many corporates are opening their headquarters in a more infrastructurally superior NCR region, a vibrant stock market would go a long way in terms of encouraging greater enterprise. Moreover, the name NSE symbolising the entire country, thus it makes more sense to shift it to the capital.

Shifting both RBI and NSE would allow these two bodies to work closely with policy makers and manage their operations in sync with economic and financial developments that have their roots at the centre. Moreover, they would even enable a more stronger & business-friendly ecoystem in the North, where a lot of new enterprise is coming up.

By:-
Back

  
 
 
       
Home | Scrutiny | Publications | About us | Contact us
Copyright @2010 iipm think tank. All rights reserved.