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?

India Today - - COVER STORY | THE ECONOMY -

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.

MAITREESH GHATAK

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