Oil prices key to monetary policies of emerging economies: Subir Gokarn

For energy-importing economies such as China and India, monetary policy is going to be influenced by global oil price movements as long as oil remains the predominant incremental source of energy, Subir Gokarn, deputy governor of the Reserve Bank of India, said in published article today.

The primary objective of monetary policy is a low and stable inflation and the core objectives will remain what they have been in the past. To achieve this, the economy has to be allowed to maintain the highest possible growth rate consistent with low and stable inflation, he said.

While the context in which these objectives are pursued may change over time, there are three key factors that are playing an important role in the current Indian context, he said.

Each of them has a bearing on both the monetary stance and the strength of the monetary transmission process.

The first critical factor is the maximum rate of growth that the Indian economy can generate without provoking inflationary pressures. This notion is a core building block in monetary economics, though it is typically labelled the potential growth rate of the economy.

If the economy is growing faster than its potential, capacities and resources are stretched. Producers and workers find it relatively easy to raise prices and wages in the face of buoyant demand for their goods and services. Rising prices across the board then translate into generalised or broad-based inflationary pressures.