Finance Minister P. Chidambaram in a joint news conference with the RBI governor clarified that while government holds the right to set country’s inflation target, the role of Reserve Bank of India (RBI) remains to be implementation of that decision. He said that sovereign has the right to set the inflation target and then the central bank has the mandate to take steps to achieve that target.
Notably, the statement came right after an expert committee set by RBI chief Raghuram Rajan last year recommended that India’s apex bank should adopt new consumer price index (CPI) for anchoring the monetary policy.
The consumer price index (CPI) has been accelerating faster than wholesale price index (WPI) and one effect of the recommendation, once accepted, would make the RBI push for higher interest rates till consumer prices moderate. However, effecting quite a shift from Wholesale price index (WPI) to new Consumer price index (CPI) for anchoring monetary policy, Reserve Bank of India (RBI), increased the repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 8.0% from 7.75% in its monetary policy on January 28,2014.
Meanwhile, the expert committee set by RBI suggested moving to an inflation target of 4 percent in three years, with a 2 percent band around either side when setting monetary policy, sharply below current levels. However, RBI’s governor Raghuram Rajan, in a bid to restore harmony between the two authorities and also to avoid sour relationship that his predecessor shared with governor, has since publicly reiterated his agreement that the government and parliament would have the final say in any decision on whether to adopt an inflation target.
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