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Business News/ Politics / Policy/  Raghuram Rajan says battling inflation remains RBI’s priority
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Raghuram Rajan says battling inflation remains RBI’s priority

Rajan says it is critical to contain inflation expectations for sustainable growth in the long-term

RBI governor Raghuram Rajan. Photo: BloombergPremium
RBI governor Raghuram Rajan. Photo: Bloomberg

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan on Wednesday said containing inflation remains the top priority of the central bank, and monetary policy tightening is necessary to contain inflation expectations.

It is critical to contain inflation expectations for sustainable growth in the long term, Rajan said.

“In order to generate sustainable growth, we have to fight inflation first. Let me also add that greater public faith that inflation will be low, will add stability to our currency and prevent the kind of gyrations we saw last summer," he said speaking at a conference in Mumbai.

“If we have to bring down inflation, we have to start today. We cannot wait till the public’s expectations of inflation get more entrenched, and the inflationary spiral gains momentum," Rajan said.

Fighting inflation has been the main focus of the central bank in the past few years. RBI has hiked its key lending rate, the repo rate, thrice since Rajan, a former chief economist with the International Monetary Fund, took charge in September last year.

Inflation based on the Wholesale Price Index (WPI) eased to 5.05% in January from 6.16% in December, while inflation based on the Consumer Price Index (CPI) slowed to 8.79% in January from 9.87% in December.

Core inflation, or non-food, non-oil, manufacturing inflation, quickened to 3.02% in January from 2.81% in the previous month.

Explaining the central bank’s thinking on the pace of rate hikes, Rajan said that RBI would prefer to increase policy rates in phases rather than at one go.

“Rather than administer shock therapy to a weak economy, the RBI prefers to dis-inflate over time rather than abruptly while being prepared to do what is necessary if the economy deviates from the projected inflation path," Rajan said, adding, “As of now, we believe the rate is appropriately set."

RBI is set to announce its next policy review on 1 April.

Meanwhile, addressing criticism that inflation arising out of rising food prices cannot be controlled through rate hikes, Rajan noted that even core consumer price inflation remains high, necessitating policy action.

“The simple answer to such critics is that core CPI inflation, which excludes food and energy, has also been very high, reflecting the high inflation in services," he said. “Bringing that down is centrally within the RBI’s ambit. But I will argue that policy is not irrelevant even in controlling food inflation, though clearly, the government also has an important role to play."

A substantial portion of the food inflation stems from an increase in food production costs, primarily because of rural wage inflation, Rajan said, adding there was a need to contain any unwarranted rise in rural wages and also improve farm productivity, besides allowing food prices to be determined by the market.

The minimum support price (MSP) mechanism should be used to provide only a lower level of support so that production decisions do not get distorted or the price wage spiral accentuated. “This means limiting the pace of MSP increases going forward," Rajan said.

The United Progressive Alliance government has come under criticism for hiking MSP for crops consistently over the years, which in turn has contributed to the high food inflation.

Addressing the changes in the monetary policy framework suggested by an internal committee, headed by deputy governor Urjit Patel, Rajan said that some of the objectives of the committee can be met without extreme hardship.

“All we have done thus far is to adopt the reasonable suggestion of the (Urjit) Patel committee that we focus on CPI inflation rather than WPI inflation as our primary objective. The Patel committee has also suggested a time horizon to glide down to 6% inflation that seems doable without extreme hardship," he said.

The central bank will discuss the Patel committee report with the government after analysing public comments, Rajan said, adding that RBI does not intend to focus only on inflation.

“...does the Patel committee intend to turn the RBI into inflation ‘nutters’ focused on bringing down inflation to the exclusion of all else, including financial stability? Of course not!", he said.

Rajan also pitched for greater autonomy for the central bank to achieve its set targets. “...international experience suggests that, ideally, once the central bank’s objective is given, and the operational target fixed, the government should leave the technocrats in the central bank to do their job," he said.

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Published: 26 Feb 2014, 08:23 PM IST
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