The Reserve Bank of India (RBI) has agreed to the proposal that the right to decide on an inflation target for the economy will become the government’s mandate and that the central bank would focus on achieving it, Finance Minister P Chidambaram said while addressing a joint press conference with governor Raghuram Rajan.
The development becomes important in view of a recent report submitted by a panel led by RBI Deputy Governor Urjit Patel that had called for the central bank to start laying out formal inflation targets, as is done in many Western nations, and then work towards achieving it.
“I met the RBI board and we discussed several issues relating to the economy,” the FM said. “I drew their attention to a part in my interim budget [in February] where I said – and I had consulted Prime Minister Manmohan Singh – that the goal of economic stability is both price stability as well as inflation.”
“I am happy that the governor has acknowledged that the government would, through the Parliament, set an inflation target leave the central bank to find ways to achieve it,” Chidambaram said.
The RBI currently focuses on balancing between growth and inflation and a proposed switch to an inflation focus had raised concerns within the government that would growth would be compromised.
“We have no problem with this formulation,” governor Rajan said. “The RBI is also obviously worried about growth and inflation. The question is how we go about achieving high growth with low inflation.”
Rajan has often said that low inflation is a must to achieve sustainable growth and that central banks cannot pursue either single mindedly.
The governor, who has hiked interest rates thrice since taking over in September last year, has resisted being strait-jacketed with terms such as “dove” or “hawk” that is often used to describe growth-focusing or inflation-focusing central bankers.
Economy better than before
“We explained to the RBI various measures that we taken to bring economic stability over the past 18 months,” Chidambaram said. “The economy has strengthened and it is reflecting in the rupee and the improved investment sentiment.”
The FM was confident that the country would achieve the FY2014 fiscal deficit target of 4.6 percent of GDP he outlined in the budget.
But when asked if he was sticking to the 4.9 percent full-year growth target outlined by the Central Statistical Organisation, he said the overall the CSO “not changed its overall recommendation after the third-quarter numbers came out.”
Economic growth for the October-December quarter came in at 4.7 percent and after the 4.2 percent and 4.8 percent figures in the first two quarters, experts have said GDP will have to grow at a relatively-high 5.7 percent figure to achieve the 4.9 percent full-year target. “I do not agree with that calculation,” Chidambaram said. “That’s an arithmetic calculation and it’s more complicated than that.”
On the issue whether gold duty, which was raised from 4 percent to 10 percent, would be cut now that the current account deficit number appears to have come down to a comfortable level, the FM said the issue would be “revisited” once the full-year number is out – while outlining a USD 40 billion CAD target for the year.
Bank licences in few weeks
On the issue of bank licenses, the committee of the central bank will discuss the recommendations of the Bimal Jalan panel, governor Rajan said.
As many as 25 applications for bank licences were reviewed by the Jalan committee, including from top corprorate houses such as Reliance and Bajaj, which submitted its recommendations to the central bank last month.
Rajan said that while it is believed that the RBI announcing new bank licences should not violate the model code of electoral conduct that has come into force, he would still seek a formal approval from the Election Commission. “If all goes well, we should be able to do it in a few weeks.”
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