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Reserve Bank has yet to decide on inflation targeting: Guv

The committee has said retail inflation should be the anchor measure for the central bank, instead of wholesale inflation

Raghuram Rajan

Amid caution from various quarters on the Urjit Patel committee’s recommendation that monetary policy should move towards inflation targeting, Reserve Bank of India Governor Raghuram Rajan said on Friday the proposal was still being discussed.

He said the government would also be consulted before a decision. The central bank had constituted a committee under the chairmanship of Patel, one of its deputy governors, on strengthening the monetary policy framework. The panel came up with far-reaching recommendations, including a monetary policy committee with the governor as its head, apart from setting targets for inflation.

“We haven’t moved into inflation targeting yet. We are exploring the recommendations... some aspects have to be discussed with the government,” the governor said at the 11th convocation of the Indira Gandhi Institute of Development Research. “We have to explore some of these aspects with the government, including setting up of a monetary policy committee and what any inflation target would be.”

The committee has said retail inflation should be the anchor measure for the central bank, instead of wholesale inflation. Rajan indicated he saw merit in that. “Probably, we should focus more on the Consumer Price Index (CPI) than the Wholesale Price Index (WPI), as CPI is what the common man sees and is based on many decisions, including wage decisions,” he said.

He emphasised that CPI-based inflation needed to be brought down, as suggested by the panel. The aim is to bring it to eight per cent in one year and six per cent at the end of two years. In February, retail inflation eased to a 25-month-low of 8.1 per cent year-on-year, against 8.79 per cent in January.

“Higher and higher levels of inflation feed on each other and the ultimate is hyper inflation. Hyper inflation has social conflict because middle class savings gets wiped out. Hyper inflation is not where we want to go. Moderate rates of inflation do not necessarily translate into hyper inflation but we need to be careful,” he said.

In the January monetary policy review, RBI had raised key policy rates in a bid to contain inflation. In doing so, it cited a “glide path” towards lowering the CPI.  “We are trying to achieve this glide path and our actions would be taken so that we can get there,” said Rajan. The central bank will review its monetary policy on April 1. In line with the Patel panel recommendations, RBI will review the policy every two months; it has decided to end the earlier framework of yearly, quarterly and mid-quarter reviews.

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