WITH STRESS ON MULTIPLE FRONTS SUCH AS A WEAK RUPEE, HIGH OIL PRICES, FLIGHT OF CAPITAL, TRADE WARS, A HIGH CAD, ETC., IS THE RBI’S SINGLE-MINDED FOCUS ON INFLATION WARRANTED?
PRONAB SEN IGC
There is nothing inherently wrong with inflation targeting, but the RBI appears to have interpreted its mandate much more rigidly than the ‘flexible targeting’ objective requires. It is really a pity that it has consistently allowed the terms of trade to shift against agriculture in the name of inflation targeting.
N.R. BHANUMURTHY NIPFP
The RBI and the MPC, under the monetary policy framework agreement, have mandated to maintain price stability (in other words, contain inflation) though [lip service is also paid to] ‘... keeping in mind the objective of growth’. In a sense, maintaining price stability is expected to ensure targeted growth. I also feel inflation is a byproduct of stability in the external accounts as well as output gap. The recent hikes by the MPC were aimed at addressing the CAD, weak rupee and capital flight issues, on the assumption that these could lead to higher inflation in the medium term. Although I expected a rate hike in the recent review, the decision of the MPC to adopt a calibrated tightening is a step in the right direction that could ensure stability on both external account as well as prices. But it is not clear if that means the RBI can change interest rates between policy reviews. LSE I do think the RBI’s main focus should be on inflation control. Having too many objectives with a limited set of instruments can make things worse. The recent increase in growth is largely consumer demand-driven which, in turn, is largely dictated by a rise in personal loans. This, together with the rise in oil prices, points to a risk of inflation.
R. NAGARAJ IGIDR
Probably not. Monetary policy has also to focus on output growth and employment situation, as in most countries. Further, in a globalised market, monetary authorities cannot take their eyes off financial stability. This is a painful lesson learned during the 2008 global financial crisis. Apparently, the monetary authorities seem much too focused on domestic concerns, or are largely operating within a closed economy framework.
D.K. JOSHI Crisil
The RBI is taking a considered stance, in my opinion. A status quo in the October policy is in sync with the monetary policy’s primary objective of ‘maintaining price stability, while keeping in mind the objective of growth’. It is important to keep in mind that the monetary policy decision was presented in the backdrop of tightening liquidity after some adverse developments in the domestic financial market. The RBI has raised the repo rate twice by 25 bps each this year in response to the inflation threat. RBI targets inflation, not the rupee, as it stated recently. Pursuing multiple targets sends confusing signals.