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No need to change RBI's inflation comfort level, says Rangarajan

Dilasha Seth  |  New Delhi 

C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said there was no need to change the Reserve Bank of India (RBI)’s comfort level from four-five per cent.

Former governor had at a panel discussion recently said should revisit its normal rate for inflation, set before India was integrated with the Some economists have agreed with this suggestion But Rangarajan, a former governor, favours retaining the comfort zone.

Rangarajan told Business Standard the norms need not be revised.

Headline averaged 8.5 per cent in 2011-12 but subsided to seven-eight per cent till October this financial year. In October, the wholesale price stood at 7.45 per cent, down from 7.81 per cent in September.

In 1998, Rangarajan had called rate at six-seven per cent as “acceptable level”. His idea of threshold was: at what level of do adverse consequences set in? “Then, level was as high as 10-11 per cent, so cutting down to six per cent was also very difficult,” said Rangarajan. He noted that high created problems on the exchange rate side, and it was desirable to contain to four-five per cent — a comfort zone as set by

According to Deepak Mohanty, executive director, RBI, if persisted beyond the threshold level of 4-5.5 per cent, it could lower economic growth over the medium term.

In his paper titled “Threshold in India: An Empirical Investigation,” he said prolonged high inflation, even if originating from the supply side, could give rise to increased expectations and cause general prices to rise.

As is inimical to growth, it becomes necessary for monetary policy to respond to contain and anchor inflationary expectations.

Agreeing with Reddy, Madan Sabnavis, chief economist at CARE Ratings, said the normal could not be four-five per cent given the fuel price hike, a 10-15 per cent increase in minimum support price increase every year, and supply constraints, among others. “A target of six-seven per cent seems more realistic,” he said.

In a country like India, where one is still dependent on monsoon for agriculture produce, can only be reduced in a phased manner in the medium-to long-run, from six-seven per cent to five per cent and then to four per cent.

According to D K Joshi, chief economist at CRISIL, although a five per cent rate was not achievable in the short run, the endeavour in the medium term should be to bring it down to the four-five per cent mark, as high hurts the poor the most.

is not reversing its monetary policy stance on the back of inflationary expectations that still persist. It has asked the Centre to take measures to cut widening fiscal deficit.The central bank will meet on December 18 for policy review amid economic growth falling to 5.3 per cent in the second quarter, which matches the rate during the fourth quarter of last fiscal, a three-year low. Not only this, growth for the entire financial year is headed to a 10-year low.

The rupee has depreciated a lot against the dollar in the last one-and-a-half years. The exchange rate was hovering at Rs 48 per dollar in June-July last year. It depreciated to touch a low of Rs 56 this financial year, and stands at Rs 55 per dollar. During October, consumer price index-based rate in the US stood at 2.2 per cent, against 9.75 per cent in India.

First Published: Wed, December 05 2012. 00:40 IST