In a major renovation of the present monetary policy structure, the Finance Ministry has given nod to the idea of setting up Centre specified inflation targets for the RBI.
As per the new rules, the Reserve Bank of India will be required to put inflation as its top concern in every policy statement.
This is in complete contradiction to what the ‘Urijit Patel committee’ had earlier recommended. The committee led by Urjit R. Patel, the Deputy Governor Reserve Bank, had suggested that the power of making decisions with regards the monetary policy, should be entrusted with a committee, put in place specifically for the purpose of examining relevant policies and headed by the Governor of RBI.
The Urijit committee had also recommended that the new Consumer Price Index as the measurement of nominal anchor for monetary policy. It further concluded that the target CPI inflation level should be fixed by the RBI 4%. The monetary policy tools should work to achieve this goal.
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The CPI inflation’s growth rate was 7.8 per cent in August. In the RBI’s September 30 policy review, the bank had notified that there could be drop in the rate up to 6% by next year. For the same reason, the RBI has been holding interest rates stable even though the industrial output growth was weak.
According to sources, the government has the view that the Central Bank, “cannot set for itself an inflation target level of 4 per cent for all times to come…the Centre will set this target.”
A senior Minister said, “It is best that inflation targets are set by the governments elected by the people and not a bunch of bureaucrats and economists sitting in the Reserve Bank.”
Raghuram Rajan, Governor of RBI had few days ago said that the reports, whether given out by him or others, have always highlighted the significance of the bank’s independence and accountability.
“It is important to ensure that the framework allows the central bank to have clear objectives and clear tools and the ability to achieve the goals,” Dr. Rajan had said in an interview.
When Arun Jaitley, the Union Finance Minister, was announcing this year’s budget, he had said that the Centre looked forward to shifting to a more contemporary monetary policy so that the multifaceted challenges of the economy could be met more readily.
The senior official also told that inflation targeted approach is ‘the’ next thing and is going to be the most standard parameter to monetary policy assessments. Citing the example of Europe’s Central Bank, he elucidated how it used ‘eclectic’ monetary policy framework along with other macroeconomic targets in place.
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Tushita is a political writer at thenational.net. Her deep rooted interest in politics, passion for writing and craze for travelling define her. Writing since her school days, she aspires to write lifelong and make the world a happier place to live with the power of her pen.
