Rigour and risk in Reserve Bank of India's reform push

Jan 25 2014, 15:46 IST
Comments 0
Under the recommendations of the panel, set up by Governor Raghuram Rajan, managing inflation would be made the primary policy goal of the RBI. Under the recommendations of the panel, set up by Governor Raghuram Rajan, managing inflation would be made the primary policy goal of the RBI.
SummaryCritics say the ideas would bring western-style rigour to an economy with emerging market problems.

The biggest overhaul of India's monetary policy in 15 years aims to tackle the nagging inflation that pushes up credit costs and stifles investment, but the changes risk imperilling already weak economic growth in the absence of broader reforms.

A Reserve Bank of India (RBI) panel recommended sweeping changes to how the central bank runs policy, including setting a long-term inflation target of 4 percent, with wiggle room of 2 percent in either direction.

Critics say the ideas would bring a western-style rigour to an economy with emerging market problems; supply bottlenecks, unpredictable monsoon rains and politically sensitive subsidy spending that drives up food prices.

Monetary decisions would be set by a committee - they are now made by the governor - putting the RBI in line with the practice at most major central banks.

The arrangement, described by Standard Chartered Bank in India as "one of the most important steps" in at least the last 15 years, may not suit India, some argue.

"I think we need to have a strong decision-maker at this stage given the peculiarities of the macro-economic situation," said Abheek Barua, chief economist at HDFC Bank.

"And I think this kind of aping of some of the western central banks does us no good. There are huge constraints on the supply side," he said.

One of the biggest sources of inflation pressure in India is a bottleneck in food production and distribution. One-third of fresh food perishes before it reaches shops and unpredictable weather often adds to supply pressures. That helps explain why consumer prices are rising around 10 percent over year-earlier levels.

"Inflation targeting is done in countries which have more stable kind of pricing," Economic Affairs Secretary Arvind Mayaram said in an interview with a TV channel.

Government incentives to grow rice and wheat as part of a subsidised food programme for the poor also keep prices high. Another cost pressure is widespread pilfering in government food schemes.

Reducing 10 percent consumer inflation to 4 percent would require politically difficult moves to curtail food prices that have been rising by double-digits for years.

"Even if inflation is higher, it does not mean that people will start eating less just because the interest rates are higher," Mayaram said.

"There are other structural issues that need to be addressed if we need to control food inflation," the official said, adding that the panel's proposal to use consumer prices to anchor inflation was "a little premature".

The current CPI

Single Page Format
Ads by Google

More from BANKING & FINANCE

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...