Tasked with a tough job to rein in inflation, RBI Governor Raghuram Rajan today said food prices can’t be controlled from the central bank and therefore it is looking to “ward off” spiral inflationary effect.
“One of the tenets of monetary policy is to accommodate supply shocks, but (we also need to) make sure you ward off second round effects…
“The food inflation should not then translate into higher wage inflation, which translates into more food inflation, higher wage inflation and gets into an inflationary spiral. So we can accommodate food inflation, but we are looking to ward off the second round effects,” Rajan said.
Addressing students while delivering a lecture at the Gokhale Institute of Politics and Economics here, Rajan said, “We can’t control food inflation from the central bank. People have to eat, and people will choose what they eat.
“There are certain types of consumption that are more easily controlled…but food is not one of the things that is easily controlled. What this means is that if there changes in food supply which cause inflation, we have to watch those…”
Earlier this year, an agreement was signed between the Government of India and RBI on Monetary Policy Framework, under which “the Reserve Bank will aim to bring inflation below 6 per cent by January 2016”.
“The target for financial year 2016-17 and all subsequent years shall be 4 per cent with a band of plus-minus 2 per cent,” the Agreement further said, while requiring RBI to report to the government with reasons in case of failure to meet the target.
On the new inflation management policy under which the government will set an inflation target for RBI to achieve, Rajan said, “We have given ourselves a two-year horizon, in which if we breach the inflation target, we want to bring inflation back into control.
“This is a medium-term flexible inflation targeting. What this means is that if we breach the limit today as the monsoon isn’t very effective, but the monsoon not being effective doesn’t necessarily mean higher food inflation…but suppose that happens, we can’t let inflation go up, but ensure that it doesn’t then percolate elsewhere,” he said.
Observing that India is a middle-income country, Rajan said there is another misconception “that if the monsoon is bad this year, and there is higher food inflation, we will miss the inflation target, so you raise interest rates like a maniac to try and bring inflation under control.
“Now, we have given ourselves a two year horizon in which if we breach the inflation target, we want to bring inflation back into control. This is medium term flexible inflation targeting.
“What this means is that if we breach the limit today because the monsoon isn’t very effective, and by the way, monsoon not being effective doesn’t necessarily mean that you will have food inflation…but supposing that happens, we can let the inflation go up, but ensure that it doesn’t then percolate elsewhere.