India to set up inflation target, RBI to implement: Chidambaram

Monday, 10 March 2014 00:00 - - {{hitsCtrl.values.hits}}

Reuters: The government has the right to set the country’s inflation target, while the Reserve Bank of India’s (RBI) role is to implement the decision, Finance Minister P. Chidambaram said in a joint news conference with the RBI governor. The comment by Chidambaram comes after a RBI panel in January proposed moving to an inflation target of 4% in three years, with a 2% 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. “The sovereign has the right to set the (inflation) target, and then the central bank has the mandate to take steps to achieve that target,” said Chidambaram as Rajan sat by his side. “I think there is a degree of convergence on the way to go forward, and I sincerely hope that in the years ahead we will be able to take this forward.” 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. RBI’s recent rate hikes come as the Congress-led ruling coalition faces general elections set to kick off on April 7. The opposition party Bharatiya Janata Party leads most national polls. 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. “The RBI is obviously worried about growth as much it is worried about inflation. The key question is how we go about achieving high growth with low inflation,” Rajan said on Friday. 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. India’s retail inflation has remained near 10% for the last three years mainly driven by food inflation, despite economic growth struggling at a decade low of nearly 5%.