The Hindu Business Line : Is conventional inflation irrelevant?

Inflation targeting is the flavour of the times. Should central banks have one or not? At last count, 21 of them had adopted it as their lodestar for interest rates. That has probably set the RBI thinking. Without formally advocating an inflation target, India's central bank has been indicating its price comfort zone. It is currently in the range of 5-5.5 per cent.

A look at the past annual, semi-annual and quarterly monetary policies and policy reviews hardly suggests any fixity about the target. It seems to be more of a moving goal post. Sometimes, the RBI makes a projection — what it thinks inflation is likely to be — and its stance in context. The recurring themes are the need for eternal vigilance on the price front and inflation control — the mantras of every central bank.

It is as much as the RBI can do, given that it is yet to be formally set free to decide monetary policy. An independent central bank is not the `cherished goal' that capital account convertibility is. Besides, the concept of inflation targeting will stir up a hornet's nest. What is an acceptable price goal? And how should we measure it? Is core inflation more important than the headline rate? Fertile field perhaps for economists, but a minefield and nightmare for policy and decision-makers. Even Alan Greenspan, the former chairman of the US Federal Reserve, is a non-believer.

Actually, what keeps the RBI awake at nights is liquidity. In our system, it drives money rates and matters more than the RBI's repo rate, which sometimes descends into irrelevance. The constant concern is whether liquidity is too much, too little or just right. The challenge is to strike the perfect balance. At what point does liquidity unleash inflation instead of idle resources? There is no definite answer. And if more growth is possible, but at the cost of more inflation, what should be the trade-off? A number of economists would say any growth-inflation matrix is a mirage. Take care of inflation and growth will take care of itself, is their take.

Clearly, the RBI does not buy inflation targeting entirely. The last thing it wants is to be cornered with a rigid price goal. It is learning and adjusting as the economy goes along.

As central banks the world over are realising, the problem with modern economies is asset price inflation, particularly in housing, not that of goods and services, of which there are sufficient global capacities. Other worries are the soaring prices of healthcare and education. All these are not or insufficiently captured in inflation statistics. Monetary policies can hardly be blamed for or can do anything about them.

It means the ball is more in the court of governments than central banks.

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