India bank sets sights on cutting inflation

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Suvashree Dey Choudhury and Tony Munroe Mumbai

Without explicitly saying so, the Reserve Bank of India (RBI) has effectively begun to target inflation based on consumer prices, a dramatic shift in approach for a central bank that has struggled to manage the balance between growth and inflation.

The bank unexpectedly raised policy interest rates by a quarter percentage point to 8 percent on Tuesday.

In doing so, it cited a “glide path” towards lowering consumer price index (CPI) inflation below 8 percent by next January and 6 percent a year later – targets that were laid out in sweeping proposals released last week to revamp the way monetary policy is conducted in India.

The core recommendation of the panel headed by deputy RBI governor Urjit Patel was to bring down CPI inflation to 4 percent, plus or minus 2 percentage points.

While that would make policymaking more predictable and less prone to government pressure, it also means rates would stay high for longer as CPI inflation now stands at nearly 10 percent – the highest among major economies.

Annual wholesale price inflation, long the favoured benchmark in India, stood at 6.16 percent last month.

“It appears the RBI is taking the responsibility head-on, saying that this is going to be their primary objective,” said Sonal Varma, an economist at Nomura in Mumbai.

“It’s a game-changer,” Varma noted. – Reuters

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