The rupee slumped by 30 paise to finish at a fresh lifetime low of 74.06 against the US dollar on Monday amid strengthening of the greenback and steady capital outflows.
The rupee had opened lower by 14 paisa against Friday’s close of 73.76 in early trade as the US dollar strength against major global currencies weighed on the rupee sentiment.
The dollar demand strengthened after China’s central bank eased its domestic policy to support the economy, amid a deepening trade war with the US that has increased pressure on growth in the world’s second largest economy.
China’s central bank said on Sunday said that it was cutting the reserve requirement rations (RRRs) by 1 per cent from October 15, which will inject a net $109.2 billion in cash into the banking system.
The passing of the monetary policy framework by the government giving the Reserve Bank of India (RBI) an explicit inflation target of 4 percent (+/-2 percent) has shrunk the central bank’s role from that of an all pervading protector of financial stability to a focused inflation targeting monetary authority. However, the financial markets are probably unused or unhappy with this change.
CNBC-TV18 caught up with, C Rangarajan, former governor of RBI, Ashima Goyal, member of PMEAC and Ananth Narayan, Professor, SPJIMR, to find whether we should revisit inflation targeting framework.
Rangarajan said, “Let me say that I favour flexible inflation targeting, I consider it appropriate. But it’s also equally important how one interprets inflation targeting. To me, inflation targeting implies that when inflation goes above or outside the range that is permitted particularly on the upper side, the central bank of the country, in this case the RBI, has no option but to control inflation and use policy instrument exclusively to control inflation. There are no excuses or no other considerations, which would come in the way of the central bank acting.”
“I do take the view that, when inflation is within the comfort zone, that is within the range, it should be possible for the central bank of the country to look at other considerations as well and I would not rule out, the central bank of the country taking action like raising the rate of interest if other circumstances demand it. Therefore, I would make a very clear distinction between whether the inflation outlook is within the range that is permitted or whether it’s outside and when it’s outside the mandate is very clear, the RBI has to act and must act to reduce inflation,” he said.
Narayan said, “I have always felt that flexible inflation targeting, which essentially looks only at CPI inflation and the instrument of interest rates to control, it’s kind of blinkered. Whether we like it or not, monetary policy impacts a variety of issues and particularly the currency markets and capital flows. When you are using an instrument, which you know has an impact on multiple factors and then you say, I am not going to consider the impact on other factors and solely concentrate on one factor, which you prefer, there is a lacuna in that system and we have to revisit this entire premise. I think we have seen a problem arise in the past and we are seeing a different kind of a problem arise now, as a result of this, completely blinkered inflation targeting approach.”
Goyal said, “Since we have just started on this inflation targeting and we have adopted it at a high inflation time, the thing is what we have adopted is flexible inflation targeting. If you see the academic literature on inflation targeting, the idea is that you communicate something simple, which helps anchor inflation expectations. How do you implement it? You have a lot of freedom there especially, if it’s flexible inflation targeting. The problem is that we have been implementing it too rigidly. If all the flexibility, which is available were used – for example, when it was first adopted in Brazil, Armínio Fraga, was the central bank governor and he communicated very clearly the supply shocks, what the central bank can affect, what it cannot and helped guide expectations down.”
“In India also, we have seen inflation expectations falling. So, what we need is to realise that instruments in a country like India – a very different market, not so thick market, the big problem was not so much that interest rates were not risen because a 25 basis points cannot affect currency markets that much. We had two back to back rises and volatility continued despite that. The point is that under inflation targeting, if inflation is within the band, it means excess demand is not high, it’s not creating inflation and so you do not need to reduce it. You can do other things such as increasing exports,” he said.