A Reserve Bank of India (RBI) panel has recommended an overhaul of the country’s monetary policy. The committee said that the consumer price index (CPI) inflation should be used to establish a formal inflation target of four percent. The report detailed that the long-term retail CPI target should be within a two percentage point range of the established target in just over two years.
Retail inflation currently stands at 9.9 percent, and as the panel suggested, this should be reduced to eight percent in 12 months and six percent the following year. Failure to meet targets would result in a public statement, as in the British model.
Failure to meet targets would result in a public statement, as in the British model
Currently, the Indian Central Bank doesn’t have a formal inflation target and the recommendation laid out by the committee is a big ask given the country’s near double digit price increases. Such changes would shift the emphasis from wholesale price inflation – India’s current main price movement indicator – towards global norms. This would result in greater transparency and predictability; a stark contrast to the central bank’s history of setting ad-hoc interests rates, often to the surprise of international markets.
Historically, the RBI has based policy on its own perception of inflation, currency stability and growth. “It will be a very, very important step for monetary policy in India,” chief economist in Asia for JPMorgan, Jahangir Aziz, told the Financial Times. “Until now, we’ve had no idea what the RBI is doing. If this proposal goes through, we will have a quantitative objective by which we can judge the RBI’s performance.”
The 130 page report also recommended the formation of a monetary policy group, whose primary objective would be inflation management. At present, interest rate decisions are made solely by the RBI governor. This committee would be led by the government and meet every two months to discuss monetary policy.
The current RBI panel was established shortly after former IMF chief economist Raghuram Rajan became governor last year. Its aim is to get New Delhi to cut its budget deficit to three percent of the GDP within three years, while loosening its control over prices. These suggested reforms coincide with general elections, which will be heavily based on being able to offer stable prices.
Despite normalising the country’s monetary policy, Indian business groups stand to be disadvantaged by such modern reforms. For years, these groups have blamed high interest rates for deterring new investment. Only once India successfully regulates its fiscal policy structures will the accuracy of these allegations come to light.
