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India’s Central Bank Governor Raghuram Rajan on Friday said the central bank is yet to move to inflation targeting and is still in discussions with the government on the same.
He also reiterated his preference for targeting retail price inflation.
“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 Mumbai on Friday.
On adopting CPI inflation as the benchmark for fighting price rise, he said “we probably should focus on CPI rather than WPI. What the RBI has said is that we are exploring the recommendations of the Urjit Patel report, and there are some aspects of it which have to be discussed with the government. 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.”
A Central Bank group 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 the Central Bank to set inflation expectations.
The report, released in early January, has also called for inflation targeting, which is a process under which the Indian Parliament should set a target on inflation for the central bank.
The report has proposed 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. Calling for sustained low inflation, Rajan said across the world, people have discovered that allowing inflation to rise eventually has costs, and does not have benefits.
He also debunked the growth-inflation trade-off saying the long run trade-off between growth and inflation doesn’t exist.
“In the long-run, people get wiser. You can’t fool them (the public), and you don’t get any additional growth…you get growth from other things, but not from generating inflation.”
However, he said that continued inflation fighting could inflict a cost on growth in the short-run.
“In the short run, there may be a cost to bringing down inflation in terms of growth. But in the long-run, bringing down inflation is a good thing and helps sustainable growth.”
Rajan, known as a monetary economist focusing on inflation control, has increased repo rates in three out of four policy reviews since taking charge last September. He will unveil the next policy on April 1.
Source: Agencies
