Reserve Bank chief reiterates preference for retail inflation as benchmark to fight inflation

Mumbai, March 21RBI Governor Raghuram Rajan on Friday said the central bank is yet to move to inflation targeting and is discussing the issue with the Government. He also reiterated his preference for targeting retail price inflation.

“We haven’t moved to inflation targeting as yet. That’s something the Urjit Patel committee suggested, and it’s not something the RBI has accepted,” Rajan said in his keynote address at the convocation of the RBI-run Indira Gandhi Institute for Development Research.

On adopting CPI inflation as the benchmark to rein in prices, he said: “We probably should focus on CPI rather than WPI.”

“What the RBI has said is that we are exploring the recommendations of the Urjit Patel report, and there are some aspects of it which have to be discussed with the Government.

“We have to explore some of these aspects with the Government, including the setting up of a monetary policy committee, including what, if any, the inflation target will be,” he explained.

The Urjit Patel report has called for moving away from the current wholesale price index-based inflation to retail price-based CPI inflation as the chief data point for the RBI to set inflation expectations.

The report, released in early January, also favoured inflation targeting, a process where Parliament sets a target on inflation for the central bank. The report, accordingly, proposed a CPI target of 8 per cent by January next and 6 per cent by January 2016.

Inflation fallout

Calling for a sustained low inflation, Rajan said that across the world, people have discovered that allowing inflation to rise eventually has costs, and does not have benefits. He also debunked the growth-inflation trade-off. “In the long run, people get wiser. You can’t fool them (the public), and you don’t get any additional growth...you get growth from other things, but not from generating inflation.”

However, he said that fighting inflation could hinder immediate growth. “In the short run, there may be a cost to bringing down inflation in terms of growth. But, in the long run, bringing down inflation helps sustainable growth.”

(This article was published on March 21, 2014)
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