Column: Cold winds and a wet spring

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SummaryAn internal inflation target will no longer be enough for emerging economies

RBI Governor Raghuram Rajan timed his interest rate hike with one eye on the domestic inflation rate and the other fixed on the US Fed. He intuited that given the timetable of Ben Bernanke’s departure, there was bound to be a farewell taper to set the scene for his successor, Janet Yellen. There will be a closely fought argument about the timing and the scale of the taper. But there will be a lot of bond disposals as the year goes forward.

It was interesting to see how many other emerging economies’ central banks were caught unawares and their currencies took a hit. For once, the rupee escaped without any effect. That tells us two things. The emerging economies are too closely tied to the Fed’s activities and they are neither powerful enough to shape the world recovery nor are they ready to take the counter-measures which will become increasingly necessary as the US and the UK recover. The US authorities, whether it is with monetary matters or fiscal, never take other countries into confidence or try to feel their pain. It is their economy they care about and the collateral damage their policies may inflict is other people’s problem.

This implies that as RBI gets systematic, it will have to develop a dual strategy. No doubt there will be inflation-targeting, with a band around the target rate of 4 %. There will also be measurement issues if a particular number for the target rate is to acquire totemic significance. It was Mervyn King’s great contribution to public debates when as the Chief Economic

Adviser, he made the Bank of England’s inflation measurement such an instructive exercise. Diagrams were printed in multicolour format making them attractive to read. People began to understand ‘fan charts’ illustrating the confidence intervals around the central projections. Rival measures of inflation, such as the retail price index and the consumer price index, could be compared. The informed public could take part in the policy debate. The later decision to print the minutes of the Monetary Policy Committee also made the Bank more accountable as well as giving outsiders a glimpse into how experts saw and judged economic trends.

Indian authorities are reluctant to give formal independence to RBI but the UPA’s policy paralysis has helped India's central bank to get its way. The transition to a new government will further aid in strengthening the de facto independence

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