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

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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.

measure was launched in 2012.

SHORT-TERM PAIN

While switching to the /bCPI as the key inflation measure would put the RBI in sync with most central banks, it would also mean current policy interest rates of 7.75 percent would likely remain high, a prospect that pushed up government bond yields by 10 basis points on Wednesday.

"These recommendations clearly carry hawkish implications," wrote Credit Suisse economist Robert Prior-Wandesforde.

Under the recommendations of the panel, set up by RBI Governor Raghuram Rajan, managing inflation would be made the primary policy goal of the RBI, ahead of growth and financial stability.

While some of the recommendations announced Tuesday would need legislative approval, most could be implemented by the central bank.

Rajan, a high-profile former chief economist at the International Monetary Fund who took office on September 4 in the midst of a currency crisis, has in the past spoken in favour of setting monetary policy by committee and establishing an inflation target using the CPI.

READY OR NOT?

The government of Prime Minister Manmohan Singh has struggled to implement reforms or remove bureaucratic hurdles that would attract investment to ease the country's inherent inflation pressures.

A 2012 decision to allow entry to foreign supermarkets, intended to reduce widespread wastage due to a lack of facilities such as refrigeration, has generated little interest because of stiff local sourcing requirements. The UK's Tesco Plc recently became the first such chain to invest, albeit with a relatively modest $110 million commitment.

Singh's government has been paralysed by corruption scandals that have stifled reform efforts. It faces an election by May, the outcome of which is uncertain.

"The question is whether there is political support for bringing down inflation. If the new government undertakes reforms to reduce subsidies and bring down food inflation, the headline CPI inflation can come down fast," said A. Prasanna, economist at ICICI Securities Primary Dealership.

The RBI's current mixed mandate of managing inflation, economic growth and financial stability all in one gives it flexibility but has also led to often-shifting priorities. Critics say that has stifled growth - Asia's third-largest economy is expanding at its slowest pace in a decade - without bringing inflation under control.

"It's a big positive for India's macro policy framework if they can get this implemented, because it will basically help I think better anchor monetary policy by establishing a clear objective," said HSBC economist Leif Eskesen, echoing the sentiments of many economists.

The challenge is fitting rigid inflation management

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