Context and Objective
The Reserve Bank of India organised the First International Research Conference (FIRC) in February 2010 on the occasion of its Platinum Jubilee Year along with a series of other knowledge-sharing events. These initiatives were aimed at making the Reserve Bank a more responsive, relevant, professional and effective public institution. To continue the knowledge-sharing events, it was decided that the International Research Conference would be held once in two years. Therefore, this Conference is the second in the series of the International Research Conferences.
The theme of the Second International Research Conference is ‘Monetary Policy, Sovereign Debt and Financial Stability: The New Trilemma’. Post-crisis, the unprecedented monetary policy easing and fiscal stimulus has resulted in sovereign debts getting bloated but supported by low interest rate regimes that artificially boost risk appetite and blur the financial stability issues. As monetary and fiscal authorities have started exiting the stimulus, interest rates could rise, resurrecting the history of sovereign debt and financial stability troubles. Tightening of monetary policies can magnify sovereign and bank balance sheet risks. This one-and-a-half day Conference discusses the challenges/dilemmas faced by central banks while conducting monetary policy under such circumstances.
The current economic situation is much more complicated than managing crisis. Central banks across the globe are in a dilemma on whether to accept explicit price stability or macro-financial stability as an objective. The public authorities learned from the crisis that only a co-ordinated approach can abate crisis. The conduct of monetary policy in the globalised world is also being affected by external developments, which significantly condition the growth and inflation outlook of national economies, besides posing risks to financial stability through contagion. Policies conducted by any systemically important country could spill over to others, thereby affecting the effectiveness of national policies. Quantitative easing policy of the US, fiscal indiscipline of several European countries, and the undervalued exchange rate policy pursued by some countries have been the prime examples in the recent period. National policies face the challenge of, first, assessing the nature and magnitude of spillover impact, and second, conducting policies that could effectively influence the ultimate policy objective. With the given complexities of the situation, greater co-operation and harmonisation is the need of the hour at the international level to deal with any further domino effect of such events. The Governors’ panel discussion during the Conference by veteran central bankers will address a set of issues that arises from these concerns, while also attempting to communicate on the issues relating to resolving the trilemma.
Lastly, there is a need to discuss whether it is possible for the central banks to be the sole authority to ensure price stability, overall economic growth and financial stability with multiple objectives and multiple instruments. Also, what would be the internationally acceptable financial architecture to prevent further crisis and what would be the exit strategy for the debt being created on account of the financial crisis.
Against this backdrop, the theme of the Conference, viz.,‘Monetary Policy, Sovereign Debt and Financial Stability: The New Trilemma’, is of contemporary relevance, which sketches a broad canvas of issues relevant to resolving the on-going crisis and redefining the role of global central banks. Also, especially from central banks’ perspective, the deliberations in this Conference would provide valuable inputs for policymaking.