Lean versus Clean

Lean versus Clean:

Is the Governor of the RBI trying to temper the craze for a runaway growth ?

The Reserve Bank of India Governor has cautioned against the perils  of growing at a break- neck speed. In his subtle  resistance to calls for policy rate cuts, Rajan  seems to reflect  the current thinking that central banks should lean rather than clean.

There is a view  that monetary policy reacts to movements in asset prices and credit aggregates only to the extent that they affected inflation and output. This is because of a perception that it is too difficult for central banks  to distinguish fundamental-driven movements from speculative bubbles in real time. The  policy rate is not adequately refined  an instrument to address the financial risks. So monetary policy  is inclined to respond to the macroeconomic consequences of financial instability, if and when it materializes.  They clean up.

Governor Rajan seems to lean against credit bubbles by using tighter monetary policy. He is using the monetary policy to  lean against the expansion phase of credit upturns, so that the RBI subtly moderates boom conditions.  He appears to hold a view that central banks need to be proactive in order to mitigate crisis risk.