Indian Finance Minister Palaniappan Chidambaram said the central bank’s board mostly agrees with him that the objective of monetary policy should be both price stability and economic growth.
A Reserve Bank of India panel led by Deputy Governor Urjit Patel in January recommended making inflation the “predominant objective” of monetary policy for the first time. The government has “made it very clear that we don’t agree with that conclusion,” Chidambaram said in an interview with the Indian Express newspaper published today.
“Our policy is that the objective of the monetary policy must be price stability and growth,” Chidambaram said. “And I think the RBI board, when I explained to them, is more or less in agreement with that approach.”
RBI Governor Raghuram Rajan cited the Patel committee’s report in raising the benchmark rate to 8 percent in January, the third increase since he took over the central bank in September. Last week he said the central bank hasn’t yet moved to inflation targeting and the proposals are being discussed.
Rajan will leave the repurchase rate unchanged at a review scheduled for April 1, according to 11 of 12 analysts in a Bloomberg News survey. One predicted an increase to 8.25 percent.
The Patel panel suggested reducing consumer-price inflation to 8 percent within one year and 6 percent by 2016, at which point it would adopt a 4 percent target with a band of plus or minus two percentage points. Any inflation target should be set by elected lawmakers, Chidambaram said.
“The buck stops with the sovereign,” he said. “It is the sovereign which has to set what the inflation target will be and what the growth objectives are.”
Consumer price-inflation eased to a two-year low of 8.1 percent in February. The rate remains the highest among 18 Asia-Pacific economies tracked by Bloomberg.
India’s economy will expand 4.9 percent in the fiscal year ending March 31, faster than the decade-low expansion of 4.5 percent last year, according to Statistics Ministry forecasts.
Chidambaram said the biggest “constraint” for the new government that will take over after elections concluding May 16 will be raising revenue. India needs higher economic growth to pay for spending, and governments should avoid borrowing more from the market in the absence of revenues, he said.
The threat of a ratings downgrade due to high fiscal and current-account deficits was the most “challenging moment” during his tenure, Chidambaram said.
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