Inflation Target: Rajan Says Over To New RBI Chief, Monetary Policy Panel

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Mumbai: Reserve Bank of India Governor Raghuram Rajan on Tuesday said the central bank has been operating with the objective of getting inflation down to 4 per cent by March 2018, but it would be on the new monetary policy setting panel and his successor to choose its own glide path to meet the target.

“When the new Governor and the new monetary policy committee (MPC) come in, they will have to give you a sense of how they view the 4 per cent target for March 2018,” Mr Rajan told wire agency reporters at a post-policy interaction here on Tuesday evening.

But the outgoing RBI governor, who will be demitting office on September 4, a full one month before the next policy, was quick to add, “As far as I, Dr (Urjit) Patel and Dr Michael Patra are concerned, we see the glide path as attempting to reach 4 per cent by March 2018.”

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It can be noted that the notification on inflation targeting issued by the government last week has given a target to get the price index down and keep it at 4 per cent till 2021 with 2 percentage points up or down.

Mr Rajan had earlier in the day announced that the MPC would start functioning by the time of the next policy announcement on October 4.

Achieving 4 per cent CPI (Consumer Price Index) inflation was first spelled out by the Urjit Patel committee on monetary policy and was adopted following an agreement between the RBI and the government under which the central bank turned its character to being an inflation-targeting one. The RBI has a leeway to keep the number 2 per cent below or above the target.

Mr Rajan said he wanted to achieve the 4 per cent number in a gentle way, without disrupting the economic growth. With the 4 per cent medium-term term target, the RBI brass was working with short-term milestones like achieving 5 per cent by March 2017, he said.

“If you see how we have approached this, we have given a longer term path but we fixate on the next post. Sometimes later in the year, you will have to start saying what after beyond 5 per cent. Typically, later in the year, from old post to the new post… At which point, you will get some guidance from the MPC,” he said.

Meanwhile, Mr Rajan on Tuesday reiterated that it makes little sense to deploy the RBI’s excess funds into recapitalisation of state-run banks and added that the central bank will soon be coming out with a detailed paper presenting its arguments.

He said the net effect on public sector’s borrowing is zero because the RBI will have to go to the public for raising the resources. But doing so will harm the central bank’s plans on permanent liquidity infusion into the system, he added.