Premature to say we’re moving towards inflation targeting: Raghuram Rajan

Jan 29 2014, 21:18 IST
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The RBI has no immediate plans to move into an inflation-targeting mode, but will aim to bring it down decisively over the next one year, governor Raghuram Rajan said. The RBI has no immediate plans to move into an inflation-targeting mode, but will aim to bring it down decisively over the next one year, governor Raghuram Rajan said.
SummaryRaghuram Rajan said the central bank is cognizant of the weak state of the economy.

The RBI has no immediate plans to move into an inflation-targeting mode, but will aim to bring it down decisively over the next one year, governor Raghuram Rajan said on Tuesday. At a press meet after the third quarter policy review, Rajan said the central bank is cognizant of the weak state of the economy, but the very reason for it is high and prolonged inflation. The RBI's measures, including Tuesday's rate hike, will bring down retail inflation to 8% over the next one year, he said. Excerpts:

Have you accepted most of the recommendations of the Urjit Patel committee?

The Urjit Patel committee report is still being studied and some of the recommendations require the government and RBI to come together. So, as and when we proceed with them, we will have to have a dialogue with the government. I think as far as today goes, we are taking a piece where the committee has done a substantial amount of work in talking about a disinflationary trend. The committee gives us a time-frame that is reasonable to bring down the CPI to a reasonable level. I think there won't be a lot of disagreements on this.

Are you moving towards inflation-targeting since you said some recommendations of the committee would be adopted?

I did not say we have accepted inflation-targeting, but we are looking at it. The Patel committee has recommended flexible medium-term inflation-targeting. What requires the government’s support, we will take it up with the government. It is premature to say that we are moving towards inflation-targeting. Time and again in our mandate, we have said we need to bring inflation down. We have also said that for us to sustain growth, we need to bring inflation down; there is no trade-off between growth and inflation.

Will growth be a second priority to inflation?

I think juxtaposing growth versus inflation is a mistake many people are making. If we cut rates right now, do you see banks going ahead and cutting rates? No. The deposit rate is high because inflation is high. The customer wants a real rate of return. If you cut rates, it is not going to create an immediate reduction in banks' cost of funds and create immediate demand. We’ve the confidence to bring inflation down. But first let’s fight the fight that needs to be fought.

Has the recent emerging market sell-off anything to do with the policy move?

Over time,

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