Government to set up inflation target, RBI to implement
Finance Minister P. Chidambaram asserted on Friday that government has the right set up an inflation target while the Reserve Bank of India's (RBI) role is to implement the decision.
The comment by Chidambaram comes after a RBI panel in January proposed moving to an inflation target of 4 percent in three years, with a 2 percent band on either side when setting monetary policy, sharply below current levels.
The recommendation raised concerns about a potential clash with the traditionally more pro-growth finance ministry, which were further reinforced after RBI surprised investors in January by raising interest rates by a quarter percentage point, its third hike in five months.
But RBI Governor Raghuram Rajan has since publicly reiterated his agreement that the government and parliament would have the final say in any decision on whether to adopt an inflation target.
Chidambaram made it clear that parliament will set an inflation target and entrust the central bank to implement the propositions.
"Government through parliament will set an inflation target and will leave the regulator to finds way of means to achieve that target. I think that is the correct approach. The sovereign has the right to the set the target and then the central bank has the mandate to take steps to achieve that target. I think there is great degree of convergence on the way to go forward," said he.
Rajan and Chidambaram addressed reporters after an RBI board meeting in New Delhi, which was attended by the finance minister.
Finance ministers traditionally attend RBI board meetings, when they are held in the country's capital.
The focus on inflation targeting had raised expectations the RBI would focus primarily on bringing down consumer prices at the exclusion of growth, even though Rajan has repeatedly said he does not see a trade-off between both.
Rajan made the comments after moments earlier Chidambaram had said it was important for India to achieve both the goals of price stability and growth.
(Posted on 07-03-2014)