Sunday, December 28, 2014
Reserve Bank of India targeting inflation over medium term: Raghuram Rajan
[Editor: It is understood that no country in the world targets short term inflation trajectory. But the moot point is: with the threats of global economy slowing down, is our learned RBI governor, visualizing the apparition of a "Dead Inflation-Monster", hitting India in the medium term? It is true that RBI's work is inflation targeting but then what about maintaining, the stability of the INR Vs USD ? With Indian consumption story going in full blood, there is need for sincere efforts to boost exports, instead of trying to balance, imports through the sale of high-coupon bonds. This has unfortunately become the RBI's strategy, since the last few years and Dr.Rajan is bereft of any innovation here. With Interest Rate at its peak, how can Indian Exports become competitive in the international domain? Moreover, the NDA government cannot go on giving export incentives every now and then, to the India Inc amidst high CAD and FD. Isn't it? Besides, the absence of GST has already made India Inc very uncompetitive when compared to competing nations like China. Dr Kaushik Basu, the game theorist and developmental economist, once said: "Inflation is a difficult issue to handle, as it could arise from several, disparate sources. It could indeed turn up as a side-effect of a noble exercise, such as for example, financial inclusion or squeezing out black money. While financial inclusion brings in more money into the financial system, black money, which typically moves slowly in its underground channels, becomes of high velocity when turned white". Asked if importing foods, (the shortage of foods is believed to be the biggest cause of inflation today) could be an answer to inflation, even at the cost of swelling the fiscal deficit, Dr Basu then said that in a situation where there is a minimum support price for food products, importing may not work out quite well. This is because if importing foods brings down the market prices of goods, then the MSP would turn out to be so attractive to the farmers that almost all the farm produce would end up in the public distribution systems. It is also pertinent to note that a sustained period of economic gloom, characterized by low growth and moderate inflation, is no longer a distant possibility for many Asian economies. The economic slowdown, if not averted, will pose formidable challenges to employment generation and human development, potentially reversing the trends in poverty reduction in India. Many economists believe that instead of focusing too narrowly on inflation, central banks could steer their policies to sustain and accelerate growth and avoid the possibility of a double-dip recession. The standard policy response to contain inflation often requires raising interest rates, which can negatively impact investment and growth. Higher interest rates can attract short-term capital, especially in economies with open capital accounts, further exacerbating the inflationary pressures. In addition to increasing instability in the financial system, such capital flows can lead to an appreciation of the real exchange rate, which can hurt exports and lower productivity growth through misallocation of resources. Short-term capital flows can also trigger asset price bubbles, which may further exacerbate inflation. The RBI governor therefore cannot become short term myopic and talk of Medium-term inflation targeting only. A RBI governor must not only be au fait with numbers, but must have his feet on the ground with a grasp of the real world, and forget the cerebral sphere of theorems and theories]
UDAIPUR, 27 Dec, 2014: RBI Governor Raghuram Rajan today said the central bank would like to focus on medium-term inflation targeting and will not chase the short-term goals.
"The medium term is what gives you time to let the economy adjust to the changes that are happening. This is the sensible inflation targeting that we have to debate about," he said at the annual conference of Indian Economic Association.
Rajan stressed no country in the world chases short-term inflation target ignoring domestic and global developments.
"What typically done is ... medium-term flexible inflation targeting ... We want to achieve this objective and we are going to give a time to reach that objective. And if we go off track we will recalibrate to reach that objective within the medium term. So, I don't have to achieve tomorrow but I have to try and get back to it over the medium term," he said.
The RBI-appointed Urjit Patel panel has suggested that the central bank should aim at 8 per cent retail inflation ( CPI) by March 2015 and 6 per cent by March 2016.
"I do believe RBI still has a role in controlling inflation. We are not going to close shop and go home."
RBI has kept interest rate (repo) unchanged at 8 per cent since January despite industry and government urging it to cut the rate.
The Wholesale Price Index (WPI) based inflation is on a decline and in November dropped to zero level, the lowest in about five-and-a-half years. Retail inflation, too, fell for the fifth straight month in November at 4.38 per cent.