- monetary coordination, since on a reciprocal basis, the finance minister too takes the governor into confidence on the fiscal stance ahead of presenting the budget to the parliament. 20. an issue that comes up often is that even as the current system is working, whether we might be better served by having a formal mpc with its majority advice becoming binding. my own view is that we should be moving towards an mpc system, but in a phased manner. bis central bankers ’ speeches there are some pre - conditions to be met. first, the central bank should be given legally - backed formal autonomy. second, in a situation where inflation dynamics are more often dictated by supply side elements, the central bank ’ s ability to control inflation is restricted. an mpc mechanism in such a situation can weaken the coordination between the government and the reserve bank. however, when our financial markets deepen further, operating procedures improve and monetary transmission becomes more efficient, shifting to an mpc system becomes a realistic option. inflation targeting 21. inflation targeting, by its very nature, is an issue in central bank governance. the defining features of an inflation targeting central bank are a precise mandate, a single instrument ( the policy interest rate ) in its armoury, a single minded devotion to achieving this target and a principal - agent relationship with the government. 22. the reserve bank is not an inflation targeting central bank. nevertheless there is an influential view that our economy will be better served if the reserve bank becomes one. the argument is that inflation hurts much more in a country like india with hundreds of millions of poor people and that the reserve bank will be more effective in combating inflation if it is not burdened with other objectives. 23. this argument is contestable. inflation targeting is neither feasible nor advisable in india, and for several reasons. first, in an emerging economy like ours, it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context. the reserve bank cannot escape from the difficult challenge of weighing the growth - inflation trade off in determining its monetary policy stance. 24. second, the drivers of inflation in india often emanate from the supply side which are normally beyond the pale of monetary policy. in particular, given the low income levels, food items have a relatively larger weight in the consumption basket in india compared to advanced economies and even many emerging market economies. we have three consumer price indices each covering different segments of the population with the weight for food ranging between

will be leakages and other set - offs. but our external situation undoubtedly improves. the welcome development enhances our disposable income ( which will increase consumer demand for other goods and services ), reduce input cost of our businesses ( which will increase margins and help to enthuse investment demand ), and aid government finances by reducing the energy subsidy burden in the budget. let me conclude by quoting a participant at the inaugural session of this year ’ s vibrant gujarat global summit : “ india will be a bright spot in an otherwise mediocre global economic outlook ”. thank you, once again, for giving me the opportunity to speak at the 7th business standard best b - school project awards function. bis central bankers ’ speeches