The panel recommends using CPI inflation as the new nominal anchor
Many analysts, on Wednesday, said the Reserve Bank of India committee’s suggestion to keep consumer inflation at the centre of its monetary policy making indicates the hawkish stance of the central bank going ahead.
The RBI committee, headed by Deputy Governor Urijit Patel, was set up in September last to revise and strengthen the monetary policy framework.
On Tuesday, in its recommendation, the committee said inflation should be the ‘nominal anchor’ of the monetary policy framework, and it should be defined without any ambiguity.
“These recommendations clearly carry hawkish implications. After all, the December headline CPI rate of 9.9 per cent is well above the current 7.75 per cent repo rate. In other words, the real policy rate is negative at a time when inflation is above even the temporary 8 per cent target rate,” global brokerage Credit Suisse said in a note.
The panel recommends using CPI inflation as the new nominal anchor, as it is the closest reflection of cost of living and inflation expectations.
The panel suggests adopting a longer-term target of 4 per cent for CPI inflation with a band of +/- 2 per cent.
However, some experts believe the panel recommendation for adopting monetary policy, which is centred on inflation, will be a shift from traditional policymaking, and will also bring RBI policy calibration closer to the international practises.
“We see the RBI’s shift to inflation targeting as a step in the right direction. The time span over which it can be achieved will vary according to a number of factors, such as the rains or the global growth cycle or oil prices,” Bank of America Merrill Lynch said in a report.
Barclays, in a note, said for the RBI to become inflation targeting, as suggested by the panel, it needed active cooperation from the Finance Ministry.
“This will be crucial in removing administered prices and adhering to FRBM-defined fiscal deficit targets,” Barclays said. Market experts believe the recommendations may not have an impact on RBI’s policy decision in the upcoming monetary policy meet, scheduled next week, and the central bank will maintain status quo.
Rates to remain highin 2014-15: Crisil
Crisil said interest rates would remain firm if the RBI accepted the recommendations of the Urjit Patel committee, which had suggested that the central bank should target inflation.
“If the RBI accepts the recommendations of the Urjit Patel committee, interest rates are unlikely to come down in 2014-15...,” Crisil said in ‘India Economic Forecast’ report.
“In other words, there is little scope for monetary policy to boost growth in 2014-15. Any recovery in investments, therefore, will be largely driven by clearance of stalled projects,” Crisil said.
“If its recommendations are adopted by the RBI, it will shift its focus on taming retail inflation...,” Crisil said.