Inflation-targeting: Has it finally arrived in India?

The writing on the wall is clear, at least, what can be interpreted from the latest reports issued from the side of the Reserve Bank of India (RBI). The rockstar governor, Raghuram Rajan, as he is expansively ascribed too in the media circles, is muscularly proposing that the country’s central bank should be empowered more to castigate inflationary fiscal policies,  structured by every incumbent government, to woo its voter base.Inflation-targeting

Is ‘inflation-targeting’ really arriving in India?

Reading the report proposed by the Urjit Patel Committee, it’s more than clear that every single soldier in the RBI flock wants to just mull over on inflation, sparing growth for the central government to be bothered about.

But, wasn’t it the same since the time controller of monetary policy, the RBI, came into existence?

It was, and still is, but has been always bullied by the policy planners warming their benches in the Finance Ministry to lend a hand in achieving growth goals. Interest rates were forced to drop at their will and similarly any ascend in the rates was always discouraged – forcing inflation to ride on a wave-trough, for the past many years.

Nevertheless, not anymore! The former University of Chicago professor is hell bent to make his words count on punishing the inflationary fiscal policies, this time around. He is doing a Volcker here and playing ‘Volckerized’ game of sorts to curb in the inflation dragon.

But, does anyone in the country, especially the financial literatures, think that four per cent target as suggested by the ‘Urjit Patel Committee’ is easily achievable – it’s burdensome to say the least. When India is presently battling against the tide of double digit inflation, the panel’s suggestion of bringing down the prices to around 6 per cent and that too within the coming two years seems laborious if not exaggerated. But, it’s what is termed as ‘Formal Inflation-targeting’. And, this is not the end of ‘Cindrella Saga’ – missing the goal for three consecutive quarters will coerce the RBI  to proffer out explanation aka British-style public statement, on why the regulator failed to accomplish its pre-laid down objectives.

However, won’t it be a tough job when legislature (either NDA , UPA or the Third Front) dwell on the dream of paying more than the state earns through Minimum Support Price (MSP) route. The latest gimmick is about providing subsidies to the power consumers. Maharashtra is latest to join the race after seeing what Delhi’s so called people friendly Aam Aadmi Party (AAP) government achieved – Energy pricing needs a relook at the earliest possible time.

Stuffing money in voter’s pockets without making them work hard and burn the midnight oil won’t do any good to their cause in the long run.

And what about Statutory Lending Ratio (SLR) – has the RBI thought about reducing it? But the question again is   – whether the central bank is really so much influential to enforce its views on the matter, especially when the government wants all banks of the country to park 23 per cent or more of their total deposits in government backed bonds. This is what is also playing a part to keep the inflation curve upwards, for the past many years.

RBI wants the centre to limit its fiscal target to meet 4.8 per cent target
and control the food and energy prices of the country.

The last question that arrives to the scene is whether the ruling governments are ready to listen to the RBI song composed by Raghuram Rajan and his aides. Hope governments have developed a taste for good songs up till now. Amen!

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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