Tuesday, Sep 30, 2014

Raghuram Rajan’s tough inflation stance risks stand-off with govt

RBI governor Raghuram Rajan has set himself a target of lowering consumer inflation. RBI governor Raghuram Rajan has set himself a target of lowering consumer inflation.
Reuters | Mumbai | Posted: August 9, 2014 11:19 am

 

RBI governor Raghuram Rajan has set himself a target of lowering consumer inflation and is even ready to raise rates to achieve it, risking friction with the new government if he is seen as overstepping.

 

Rajan, well known within RBI for pragmatism, now must work with the government, which understands the need for – and wants – lower inflation, but doesn’t see the value in hard targets. The governor’s people skills may be tested when finance minister Arun Jaitley attends Sunday’s RBI board meeting in Delhi, representing a government that is equally keen on boosting an economy that has just had two consecutive years of sub-5% growth.

 

The meeting comes after Rajan surprised markets after the RBI’s policy review on Tuesday by establishing in clear terms RBI would get consumer inflation down to 8% by January 2015 and 6% a year later.

 

Officials familiar with RBI’s stance warn that Rajan is committed to those goals, even if he has yet to receive explicit political backing.

 

“If we don’t get support from the government, we have to hit it harder,” a senior official told Reuters.

 

“If inflation doesn’t come down as projected and supply-side measures are not taken, interest rates may need to go up to reach the 6% goal.”

 

Meeting that target won’t be an easy feat in a country with unpredictable monsoon rains and dependent on oil imports. The consumer price index spiked to 11.2% in November before three interest rate hikes from Rajan helped bring inflation down to 7.3% in June.

 

Rajan will need to tread carefully in pushing the government into action, according to analysts. Although RBI is not statutorily independent from the finance ministry, it has long enjoyed wide latitude in policy-making.

 

But failure to act on Rajan’s pledge to bring down inflation would hurt the central bank’s credibility.

 

Jaitley, in public comments, had acknowledged the importance of bringing down inflation, and said he is committed to working with RBI while taking limited action such as curbing hoarding of food staples.

 

But the Modi government is yet to unveil any substantial reforms even after Jaitley surprised markets by committing to meet an ambitious fiscal deficit target of 4.1% of gross domestic product set by the previous Congress-led government. Nor has the government yet endorsed the inflation targets unveiled in January by an RBI panel led by deputy governor Urjit Patel.

 

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