RBI released Urjit Patel Panel's report on the monetary policy framework on Tuesday. According to the report, inflation should be the nominal anchor for the policy framework. That is akin to the US Federal Reserve's inflation targeting policy. The move hasn't gone down well with the finance ministry. Sources have exclusively told CNBC-TV18 that the ministry disagrees with the recommendations and will examine if they are suited to Indian needs.
Developed countries across the world have inflation targeting and it is considered important for a successful monetary policy as well as for inflation control. Sources in the finance ministry say that it may work well in developed economies, but it is not suited to India's system. If we had inflation targeting then we would perpetually have a tight monetary policy and what would that do to growth. Growth is important in a developing country scenario and hence that decision between growth and inflation that trade off has to be dynamic and it cannot be fixed due to inflation targeting.
Also sources add that this is just a view of a particular panel that had been set up by Dr Raghuram Rajan. The passage of this report and its implementation into policy may not be so easy because the finance ministry or rather any government is unlikely to support inflation targeting given the fact that inflation is so high in India and if it were to be 4 percent - plus/minus a band of 2 percent then one would not see any scope for rate cuts.
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