Govt, RBI yet to agree on inflation targets: Rajan

21 March 2014

The Reserve Bank of India (RBI) is yet to move to inflation targeting and is still in discussions with the government on the draft recommendations of a panel on the subject, Governor Raghuram Rajan said today.

A committee headed by RBI deputy governor Urjit Patel to suggest ways of reining in inflation has proposed basing inflation estimates on consumer price index against the current practice of following the wholesale price index, which does not reflect the true level of prices and inflation.

While the RBI has a preference for targeting retail price inflation, the government, which has so far been anchoring policies on wholesale price inflation, seems to have doubts over its policy implications.

''We haven't moved into inflation targeting as yet... That's something the Urjit Patel committee suggested, and its not something the RBI has accepted,'' Rajan said in his keynote address at the convocation of the central bank-run Indira Gandhi Institute for Development Research here.

On adopting CPI inflation as the benchmark for fighting price rise, he said ''we probably should focus on CPI rather than WPI,'' but there are some aspects of it which have to be discussed with the government, he said, adding, ''What the RBI has said is that we are exploring the recommendations of the Urjit Patel report''.

''We have to explore some of these aspects with the Government, including the setting up of a monetary policy committee, including what, if any, the inflation target will be,'' he explained.

On retail inflation, he said, ''We need to bring CPI down. Whatever level it comes down to, but the path to bring it down to is 8 per cent by the end of this year, and 6 per cent at the end of the second year.''

The Urjit Patel report has called for moving away from the current wholesale price index based inflation to retail price based CPI inflation as the chief data point for RBI to set inflation expectations. The report, released early January, has also called for inflation targeting, which is a process under which Parliament should set a target on inflation for the central bank.

The Urjit Committee report suggests a CPI target of 8 per cent by January next and 6 per cent by January 2016.

CPI index for February came in at 8.1 per cent and WPI at 4.78 per cent for the month.

The Reserve Bank governor said there was nothing that a gradual rise in inflation would have brought about.  People across the world have discovered that allowing inflation to rise eventually has costs, and does not have benefits, he said.

He also debunked the growth-inflation trade-off saying the long run trade-off between growth and inflation doesn't exist.

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