Rangarajan was in Bangalore to accept The Financial Express Award for Economics '98 on Sunday at the ongoing Indian Economic Association's annual conference. Among various measures that he said were needed to be taken to strengthen the banking system as well as improve the macroeconomic scene, he ranked risk management high on the priority list.

He said risks -- whether they pertained to credit, liquidity, interest rate, currency or contingency -- were the result of some kind of mismatch. In the event of assets and liabilities being matched in terms of maturity and if they werein the same currency, Rangarajan said there would be no foreign exchange risk. However, he added, such a situation was not possible and even if it were, it would be sub-optimal with respect to profitability. He pointed out that risk was inherent to all business activities and what was required was to manage it.

Rangarajan predicted that the future course of the Indian banking sector would be dominated by greater specialisation by banks in niche markets such as retail, agriculture, exports, etc, and there would be greater reliance on non-fund businesses such as advisory, consultancy, guarantee and custody services. He said there would be a greater overlap in product coverage between commercial banks and non-bank intermediaries as also greater `financial disintermediation' with large corporates going for securitiesed debt in the domestic as well overseas financial markets.

On monetary policy, he said there was a need for greater clarity on whether the main objective should be price stability or theacceleration of economic growth. According to him, price stability was the key to sustained growth, though price stability in itself was not the ultimate objective. It is important only insofar as it contributes ``to improving the growth and productive potential of the economy''. Rangarajan said that while price stability and growth may sometimes not look compatible in the short term, in the long run there was no contradiction between the two objectives. Making a case for price stability, Rangarajan emphasised that volatility in prices created uncertainties in decision-making. Rising prices adversely affected savings, making speculative investments more attractive. He said exchange rate erosion and nominal interest rates also hinged on domestic price stability.

``Domestic price increases should not deviate too far from price increases of our trading partners, if exchange rate stability is to be achieved,'' he said. Moreover, a sustained reduction in interest rate was possible only if the inflation rate(based on domestic prices) remained low and inflationary expectations were broken. Pointing to the west, Rangarajan said maintenance of price stability had ``become almost an article of faith with the central banks''. The principle had been enshrined in the Maastricht Treaty and the objective was no longer disputed.

Regarding interest rates, he said they would eventually emerge as an instrument of policy along with money supply as the Reserve Bank acquired greater autonomy in the regulation of reserve money. Control of reserve money through open market operations, both outright and `repos', had become possible, he pointed out.

Earlier, accepting the The Financial Express Award for Economics '98 from eminent economist and former IEA president MV Mathur, Rangarajan said the award was ``a recognition of the significant changes that had occurred in the financial and monetary system in the recent years''.

The citation

In presenting The Financial Express Award for Economics 1998 to Dr CRangarajan, The Financial Express is delighted to recognise the extraordinary merits of one of the country's leading economists who excels in each of the three criteria prescribed for this award. As a teacher of economics, as a researcher of high merit and as a person whose impact on economic policy-making is clearly impressive, Dr Rangarajan holds a unique position in the country and is second to none.

After obtaining the degree of BA (Hons) from Madras University, Dr Rangarajan proceeded to the University of Pennysylvania from where he obtained his PhD. He taught for some time at the Wharton School of Finance and Commerce, University of Pennysylvania, as well as the Graduate School of Business Administration at New York University. The benefits of his excellent teaching have been available in plenty to Indian students at Loyola College, Madras, at the University of Rajasthan, Jaipur, at the Indian Statistical Institute, New Delhi, and, for more than a decade-and-a-half, at the Indian Institute ofManagement, Ahmedabad.

His substantial achievements in the fields of monetary economics, financial institutions, economic planning and industrial economics are embodied in his published research work and writings in professional journals and books. Among his books are: Short-term Investment Forecasting (1974); Principles of Macro-economics (1979); Strategy for Industrial Development in the '80s; Innovations in Banking (1982); Agricultural Growth and Industrial Finance in India (1982); and Indian Economy--Essays on Money and Finance (1998).

Dr Rangarajan's impact on economic policy has been substantial as well as continuous. He held the position of Deputy Governor, Reserve Bank of India, for almost a decade during which time he was instrumental in bringing about a number of changes in the credit and financial system, both in terms of the induction of new instruments and new institutions. Between 1985 and 1991, he was a member of the Economic Advisory Council of the Prime Minister. He wasPresident of the Indian Economic Association in 1988 and President of the Indian Econometric Society in 1994. As a member of the Planning Commission, Dr Rangarajan had a critical role to play in the formulation of the Eighth Five-Year Plan. He also served, for a brief period, as a member of the Tenth Finance Commission.

In the post-liberalisation period of the 1990s, Dr Rangarajan made some of his most critical contributions to economic policy-making. The changes in exchange rate management, culminating in the unified market- determined exchange rate mechanism, were made on the recommendations of a committee of which he was Chairman. With all these achievements, Dr Rangarajan was destined to become the Governor of the Reserve Bank of India in 1992.

During the five years that he served in this distinguished position, he made monetary policy into a flexible instrument of economic policy to achieve growth and price stability. He achieved significant success in lowering inflationary expectations in theeconomy during his tenure as RBI governor.

Dr Rangarajan gave a major thrust to financial sector reforms, including the simplification and deregulation of the interest rate structure and the rationalisation of reserve requirements for improving banks' lendable resources.

His reforms helped strengthen the soundness of banks though the institution of internationally-accepted prudential norms and an improved provisioning system for non-performing assets, upgradation of information technology, and the introduction of a greater element of competition in the financial system.

The agreement entered into between the Government of India and the Reserve Bank of India during his tenure, on the institution of Ways and Means Advances, has provided the central bank with greater autonomy in the conduct of monetary policy.

Given his impressive achievements, Dr Rangarajan has been a recipient of several awards, including the Finance Man of the Decade award given by the Bombay Management Association, 1998; the HonoraryFellowship of the Indian Institute of Management, Ahmedabad, 1997; and the Business Man of the Year 1997 Award, given by the Madras Management Association. Dr Ranagarajan is now occupying the august position of the Governor of Andhra Pradesh which he fills with great distinction.

In recognition of the highly meritorious constributions of Dr Rangarajan, The Financial Express is delighted to present him The Financial Express Award for Economics 1998 at this annual conference of the Indian Economic Association.