Haven’t moved to inflation targeting yet: Rajan

The Reserve Bank of India (RBI) said that they have not moved into inflation targeting as yet.

“We haven’t moved into inflation targeting as yet. There is something that the Urjit Patel committee suggests but that is not something, which the RBI has accepted. We are exploring the recommendations of the committee report and there are some aspects of it, which has to be discussed with the government. We have to explore some of these aspects with the government including setting up of a monetary policy committee, including what is any inflation target would be,” said Raghuram Rajan, governor, RBI on the eleventh convocation of Indira Gandhi Institute of Development Research.

Rajan highlighted the two things in the Urjit Patel committee report, which are useful. “First is probably we should focus more on Consumer Price Index (CPI) than Wholesale Price Index (WPI) because CPI is what actually the common man sees and based on many decisions including wage decisions. Second is that we need to bring CPI down and a reasonable path to bring it down overtime whatever level it ultimately comes down to. A path to bring it down is 8% by the end of this year and 6% at the end of two years,” he said.

Rajan believes that across the world it has been discovered that allowing inflation to rise does have costs and doesn’t have benefits. “Higher and higher level of inflation feed on each other and the ultimate is hyper inflation. Hyper inflation has social conflict because middle class savings gets wiped out. Hyper inflation is not where we want to go. Moderate rate of inflation do not necessarily translate into hyper inflation, but we need to be careful,” he said.

Speaking about the disadvantages of high inflation Rajan said that high inflation is bad. “In the short run there may be a cost to bring down inflation in terms of growth but probably in the long-run bringing down inflation is a good thing,” he said.

In the January monetary policy review RBI had raised key policy rates in a bid to contain inflation. In doing so, it cited a “glide path” towards lowering the CPI.

“We are trying to achieve this glide path and that our actions would be taken so that we can get there,” said Rajan.

In February, CPI inflation eased to a 25-month-low of 8.1% year-on-year, against 8.79% in January.