Raghuram Rajan says retail inflation targeting awaits government nod

Written by Press Trust of India | Mumbai | Updated: Feb 28 2014, 15:01pm hrs
Raghuram RajanRaghuram Rajan had said on the sidelines of the G20 summit in Sydney that the government was on the same page as the RBI on inflation targeting. (PTI)
Reserve Bank Governor Raghuram Rajan today said although the central bank strongly favours the Urjit Patel committee's suggestion on targeting retail inflation, the final decision would come only after the government's approval.

"All we have done thus far is to adopt the reasonable suggestion of the Patel committee that we focus on CPI (consumer price index) inflation rather than WPI (wholesale price index) inflation as our primary objective," Rajan said at the Fimmda-PDAI annual conference here this evening.

"The Patel committee report is out there for public comment and debate and once we collect and analyse comments, we will take an internal view and then start deliberations with the government," he said.

Earlier this week, Raghuram Rajan had said on the sidelines of the G20 summit in Sydney that the government was on the same page as the RBI on inflation targeting.

The Patel committee has suggested bringing down CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. Retail inflation was 8.79 per cent in January.

Rajan said the committee's proposed time horizon for 6 per cent inflation seems doable without extreme hardship.

"If the eventual decision of the government, in consultation with the Reserve Bank, is to adopt the recommendations of the Mistry, CFSR, FSLRC and the Patel committees, and focus on some form of an inflation objective, it would be good for the medium-term inflation target to be set by the executive or the legislature, presumably based on advice from the Reserve Bank and other experts from the Reserve Bank," the Governor said.

"All this said, international experience suggests that ideally once the central bank's objective is given and the operational target fixed, the government should leave the technocrats in the central bank to do their job," he added.

He said the Patel committee does not turn the RBI into "nutters" focused on bringing down inflation to the exclusion of all else, including financial stability.

Rajan also said medium-term flexible inflation targeting means the monetary policy committee focuses on price increases over the medium term, being concerned about inflation that's too high as well as too low.

"That means it may be willing to overlook temporary inflation spikes, such as this November's inflation numbers, but also raise rates when sustained low interest rates and low inflation increase threats to financial stability - because a financial crisis could lead to deflation," Rajan said.

He said the monetary policy committee will not put on blinkers and watch only the inflation number.

A number of emerging markets have adopted some form of targeting, while others like the US Fed focus on inflation in all but name, including putting a numerical target to its goal of price stability.