The Reserve Bank’s primary objective is price stability – they look at other objectives such as growth and financial stability only in an environment of price stability, said former RBI governor D Subbarao in conversation with CNBC’s Bernie Lo from the sidelines of the Credit Suisse conference in Hong Kong.
If there is no price stability, it becomes to overriding objective, he said. “So in a sense you can look upon this inflation targeting as formalized issue of what RBI is doing. But in other sense, it is quite transformative because RBI’s objectives as well as the reaction function have been non-transparent, RBI could do whatever it did and explain it in a way because it seemed consistent with the policy – only because the policy of the objective is so widely defined,” he added.
However, he quickly added that inflation targeting in India is difficult because much of inflation comes from supply shocks and supply shocks are less amenable for correction by monetary policy. So whether RBI will be able to deliver or an inflation target will depend on how the structure of inflation will change.
With Asian Development Bank (ADB) earlier projecting India’s growth rate to surpass China and improve to 7.8 percent in the next fiscal and further to 8.2 percent in 2016-17. Subbarao says governor Raghuram Rajan will continue to struggle with containing inflation and supporting growth.
For further rate cuts in the economy, Rajan will have to look at how much of disinflation that was witnessed is cyclical, how much is structural. RBI wants to create an environment of price stability in order to inspire confidence of investors around the world and in order for consumers to take important decisions.
He also added that India is globalizing and globalizing economy cannot afford to have a very wide inflation differential with the rest of the world. Finally, RBI will also have to be concerned about the interest of savers. “What we hear, what we see in the public media is all about attrition that people who want low interest rates but we must also remember that there are vast constituency there that wants high interest rates because they are saving money.”