The governor of the Reserve Bank of India (RBI) is reported to have hinted at the possibility of a new normal for inflation in formulating monetary policy. If it were so, it is likely to be around 6.5 to seven per cent against four to five per cent now. The idea is in line with the time-honoured practice of revising the target to match the achievement in our five-year plans. Eventually, it would become 9.99 per cent, since that is also below double-digit inflation.
The danger is the likely large-scale effect on RBI’s acceptable estimate of growth in money supply. Now, to accommodate, nay, to generate, inflation of five per cent, it adds a similar percentage to the estimate based on the Gross Domestic Product growth and income elasticity of demand for money to get the final figure for policy purposes. Would the new normal mean that, say seven per cent, will be added? Be prepared for a mini-hyper inflation.
The Preamble to the RBI Act 1934 mandates “monetary stability” as its objective. Till the middle of the 1980s, it meant stability in prices or the purchasing power of the rupee. It has since been conveniently distorted to mean the stability of the inflation rate. The difference between the two interpretations, its impact on policy-making and the consequence for the common man can easily be guessed. While the judiciary cannot lay down policy, the interpretation of the law is its legitimate function. It is time for public interest litigation to know the Supreme Court’s views on the interpretation of the Preamble.
A Seshan Mumbai
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