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Despite Reserve Bank of India (RBI) Governor Raghuram Rajan ruling out any trade-off between growth and inflation and emphasising on curbing prices as a pre-requisite for growth, Finance Minister P Chidambaram yet again reminded the central bank of the need to strike a balance between growth and inflation.
After taking charge in September, Rajan raised interest rates thrice, by 25 basis points (bps) on each occasion, showing his strong resolve to restore price stability amid weakening growth. Economic growth for the current financial year is seen at 4.9 per cent, as compared to 4.5 per cent in 2012-13.
“In a developing economy we must accept that when our aim is high growth, there will be a moderate level of inflation. RBI must strike a balance between price stability and growth, while formulating monetary policy,” said Chidambaram, in his interim Budget speech.
On the other hand, a high-level committee of the central bank, headed by RBI deputy governor Urjit Patel, recently proposed inflation-targeting as its main mandate and proposed four per cent consumer price inflation be the aim of the monetary policy.
“Today’s budgetary projections for the fiscal deficit and borrowings do not spring any major surprises and, hence, will refrain from triggering any additional challenge for the Reserve Bank of India's monetary policy stance,” said Siddhartha Sanyal, chief India economist, Barclays.
Rajan recently described inflation as a destructive disease and said RBI had no choice but to keep rates high, as inflation was at eight per cent. Consumer Price Index-based inflation was at a 24-month low in January, at 8.79 per cent but much above the central bank’s comfort zone.
"The point is inflation is hitting growth in the long run. There can be no trade-off. There is need to bring inflation down. Can we get inflation under control and get high growth," Rajan had asked.
The finance minister, however, ruled out any contradiction between North Block and Mint Road’s stance.
“In the US, the mandate to the Fed Reserve is price stability and employment. In many European countries, it is price stability and employment. In many developing countries, the mandate is price stability and growth. RBI is an autonomous monetary authority. Ultimately, the direction in which the country must go and the pace at which the country must grow are determined by the elected government,” Chidambaram said, while interacting with the media.
“We have said from a developing country point of view, the policy should be to strike a balance between price stability and growth. There is no contradiction. We have simply articulated this more forcefully on an appropriate occasion,” he added.
According to market participants, while a lower fiscal deficit and narrowing current account deficit will comfort the central bank it is too early to talk about monetary policy reversal.
The minister informed the lower house that the fiscal deficit for the current financial year will be 4.6 per cent of the gross domestic product, lower than 4.8 per cent as estimated in previous year’s Budget. The finance minister had described 4.8 per cent as the “red line” and had assured it wouldn’t be crossed.
“Lower current account deficit will mean lesser stress of imported inflation. But for RBI to cut rates, inflation has to come down, as the current CPI numbers are much above the central bank’s comfort zone. The fiscal deficit has come down below the target, but what is worrying is that planned expenditure was cut while unplanned expenditure was higher,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
She also said high unplanned expenditure fuels retail inflation, as it put money in the hands of people. “On the other hand, cut in planned expenditure affects the corporate payment cycle, which in turns hurt growth,” Nitsure added.
Market watchers are now looking how the relationship between the central bank and the new government, which will be formed in May, will work out, which is seen crucial so far as RBI’s inflation battle is concerned. “RBI’s long-term agenda of inflation targeting, if adopted, will need a high degree of long-term co-ordination with the government. In this regard, a clearer picture will emerge only after the new government takes charge and elaborates their priorities and policies,” Barclays’ Sanyal said.
After taking charge in September, Rajan raised interest rates thrice, by 25 basis points (bps) on each occasion, showing his strong resolve to restore price stability amid weakening growth. Economic growth for the current financial year is seen at 4.9 per cent, as compared to 4.5 per cent in 2012-13.
“In a developing economy we must accept that when our aim is high growth, there will be a moderate level of inflation. RBI must strike a balance between price stability and growth, while formulating monetary policy,” said Chidambaram, in his interim Budget speech.
On the other hand, a high-level committee of the central bank, headed by RBI deputy governor Urjit Patel, recently proposed inflation-targeting as its main mandate and proposed four per cent consumer price inflation be the aim of the monetary policy.
“Today’s budgetary projections for the fiscal deficit and borrowings do not spring any major surprises and, hence, will refrain from triggering any additional challenge for the Reserve Bank of India's monetary policy stance,” said Siddhartha Sanyal, chief India economist, Barclays.
Rajan recently described inflation as a destructive disease and said RBI had no choice but to keep rates high, as inflation was at eight per cent. Consumer Price Index-based inflation was at a 24-month low in January, at 8.79 per cent but much above the central bank’s comfort zone.
"The point is inflation is hitting growth in the long run. There can be no trade-off. There is need to bring inflation down. Can we get inflation under control and get high growth," Rajan had asked.
The finance minister, however, ruled out any contradiction between North Block and Mint Road’s stance.
“In the US, the mandate to the Fed Reserve is price stability and employment. In many European countries, it is price stability and employment. In many developing countries, the mandate is price stability and growth. RBI is an autonomous monetary authority. Ultimately, the direction in which the country must go and the pace at which the country must grow are determined by the elected government,” Chidambaram said, while interacting with the media.
“We have said from a developing country point of view, the policy should be to strike a balance between price stability and growth. There is no contradiction. We have simply articulated this more forcefully on an appropriate occasion,” he added.
According to market participants, while a lower fiscal deficit and narrowing current account deficit will comfort the central bank it is too early to talk about monetary policy reversal.
The minister informed the lower house that the fiscal deficit for the current financial year will be 4.6 per cent of the gross domestic product, lower than 4.8 per cent as estimated in previous year’s Budget. The finance minister had described 4.8 per cent as the “red line” and had assured it wouldn’t be crossed.
“Lower current account deficit will mean lesser stress of imported inflation. But for RBI to cut rates, inflation has to come down, as the current CPI numbers are much above the central bank’s comfort zone. The fiscal deficit has come down below the target, but what is worrying is that planned expenditure was cut while unplanned expenditure was higher,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
She also said high unplanned expenditure fuels retail inflation, as it put money in the hands of people. “On the other hand, cut in planned expenditure affects the corporate payment cycle, which in turns hurt growth,” Nitsure added.
Market watchers are now looking how the relationship between the central bank and the new government, which will be formed in May, will work out, which is seen crucial so far as RBI’s inflation battle is concerned. “RBI’s long-term agenda of inflation targeting, if adopted, will need a high degree of long-term co-ordination with the government. In this regard, a clearer picture will emerge only after the new government takes charge and elaborates their priorities and policies,” Barclays’ Sanyal said.
