Fed ex-chief Bernanke makes strong pitch for RBI autonomy

With India in the midst of elections and the likelihood of a new government within next two months, former United States Federal Reserve chairman Ben S Bernanke on Tuesday strongly advised the next government to keep the Reserve Bank of India independent.

In conversation with Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank, at a function in Mumbai attended by the big names of Indian business and administration, the former Fed chairman said, ''I am sure he (Reserve Bank of India governor Raghuram Rajan) will maintain the most important thing a central banker can maintain - an independent policy.''

He further said, ''You have an excellent central bank governor in Raghuram Rajan, who has been my long-time colleague as an academician in the US. As the Indian economy matures, an independent and responsible central bank is really central to its success."

Bernanke, who has worked with both the Republican and Democratic governments as Fed chairman, said he was lucky as both Presidents George W Bush and Barack Obama were strong defenders of the central bank's autonomy.

Bernanke, who retired January-end this year, confessed he did not know much about Indian politics. He, however, said, ''In a mature economy like India's, which is becoming modern and a financially-oriented economy, an independent central bank, responsible central bank is really central to success.''

The former Fed Reserve chairman was responding to Kotak, who pointed to the fact that India was in the midst of elections and could see a new government in June. Kotak asked Bernanke to share how he had managed two presidents, George Bush and Barack Obama, during his tenure.

''In United States, we were lucky - President Clinton, who you said was here last year, was a great defender of central bank dependence as was President Bush who appointed me and President Obama who reappointed me. They were always very careful to say that the monetary policy was not their responsibility and that independence, it was real, and not just verbal, is very important,'' Bernanke said.

When asked about his views on inflation targeting, and the debate whether this should be a single point mandate for a central bank, Bernanke said he has been very supportive of inflation targeting since before he became the Fed chairman. ''The reason for that though is not necessarily the same as in the other context, which is that monetary policy benefits from clarity and transparency. And it really helps to let people know what you are trying to achieve, particularly in countries where inflation has been high.

''Setting a target, even if it's a higher target which comes down over a period of time, is useful because it tells market what to expect and probably helps the process of bringing inflation down. It's not inflation per se, but transparency and the need for the central bank to explain what it is doing is intrinsic part of inflation targeting,'' said Bernanke.

This, however, did not mean that the central bank ignores everything else, he added.