D Subbarao's speech in Hyderabad yesterday needs to be viewed against the proposal to set up the Financial Stability and Development Council (FSDC). Particularly since he didn't refer to the proposed regulator even once during his speech. What he did say, though, is that Central Banks are best positioned to ensure financial stability, and could fulfil their functions more effectively if they become the systemic regulator.
Talking about the feasibility of inflation targeting, Gov. Subbarao also referred to two impediments imposed by the government: administered interest rates, and large government borrowings.
Interestingly, just a few hours later, the Finance Minister found it necessary to praise the Governor in Parliament, "The Reserve Bank is managing in such a way that one does not elbow out the other (government borrowings and company investments)*. And that is a very skilful exercise I must appreciate the role that the RBI Governor has played in the last year - there was no mismatch in the market and there was no crowding out in the market."
Clearly the Governor is feeling miffed, the FM needs him; hence this public stroking.
However, inflation, which is the real issue, won't disappear with the FM's sweet words
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