India's central bank is not one of them. Here, the Reserve Bank of India'sdilemma is still far from over even though bankers are arguing that the timeis ripe for it to choose inflation targeting over interest rate targeting.

While the Bank of England and the Bank of New Zealand are acknowledgedexponents of inflation targeting, the central banks of the United States,Germany and, till now, Japan have been active proponents of a combination oftargeting interest rates and monetary aggregates (Japan uses the interestrate as its daily operating target and monetary aggregates -- M2+CDs -- as amedium-term intermediate target). In fact, both Japan and Germany have usedmonetary targeting more successfully than other G-7 countries.

However, the Indian scenario presents a different picture. The RBI isinvolved in just about everything: from managing overall growth targets tosetting interest rates to meet these growth targets, managing exchange ratesand finally managing money supply in order to keep a check on inflation andmaintaining price stability. Some of these objectives are clearlycontradictory in nature: Can you fashion interest rates to boost growthwithout stoking inflation? Can you hold exchange rates steady withouttargeting inflation and money supply?

This lack of clarity in purpose makes the RBI's job a messy affair. On theother hand, compare this with the central bank of New Zealand which is notunduly bothered about growth, productivity or exchange rates and its focusis primarily on managing the inflation rate. It has signed a contract withthe finance ministry to review the interest rates every two years. Only inexceptional circumstances, as in the case a rise in crude oil pricesworldwide, does the central bank step in to intervene to review interestrates.

Can that happen in India where the central bank is perceived to be anextension of the ministry of finance? Only two years back, there was hue andcry when the committee on capital account convertibility (CAC) called for amandated rate of inflation. Although there needs to be a change in thestance of monetary policy-perhaps choosing price stability over exchangerate management-one needs to gauge the various pros and cons of inflationand interest rate targeting, cautions one senior banker.

Former central banker and chairman of the CAC panel, SS Tarapore, feelsthere are advantages in inflation targeting and the time is right for theIndian central bank to move towards this objective.

Says he: "First, the government is committed to the inflation target and,therefore, makes it that much easier for the central bank to work towardsthat target; moreover it is easier for the public to understand than moneyor exchange rate targets. Secondly, the policy becomes transparent, enablingeconomic agents to better plan their activities.

"Thirdly, inflation targeting helps discipline monetary policy and thecentral bank becomes more accountable. It is best that the goal is set bythe government and the central bank is given instrument independence toattain the goal."

The RBI, however, needs the required degree of autonomy to handle theinstrument for inflation targeting.

Tarapore argues that in the Indian context interest rate targeting isclearly not a viable option as in some important areas interest rates arestill subject to controls. Interest rate targeting can, thus, lead to a biastowards lower rates in interest than warranted.

"The interest rate had best be used as an instrument of policy and not as atarget per se. We in India should not be carried away by discussions in theindustrial countries of rules which recommend the setting of interest ratesbased on whether inflation and output are above or below target," saysTarapore.

These rules -- called Taylor rules after the US economist John B Taylor-havebeen evolved in industrial countries because of the impact of financialinnovation on relationship between money, income and prices. In India,however, due the stickiness of interest rates and a partly administeredinterest rate structure, such rules would not make sense.

The Reserve Bank of India had, in it annual report for 1996-97, argued thatit is better to target money supply over interest rates as various marketsegments in India are still not integrated as in the developed nations.

"However, the monetary authority must watch the behaviour of interest ratesin various markets and must be willing to intervene and smoothen thevolatility. This is not necessarily inconsistent with an overall monetarytarget. In fact, with the inflation rate coming down and remaining in anarrow range, it becomes possible to focus on interest rates along withoverall monetary growth," the RBI concludes.

Bankers have been awaiting a paradigm shift in the RBI's stance on monetarypolicy which is only possible when it it backed by the right political will.