'Price stability should be key aim of central banks'

Prime Minister's economic panel chairman C Rangarajan today said price stability must be the prime objective of the central banks in developing countries, a comment comes amidst fears of high inflation derailing economic growth prospects.

Rangarajan, the chairman of Prime Minister's Economic Advisory Council, also said that interventions by monetary authorities to stabilise exchange rates should be exceptional cases.

"Central banks need to be transparent and explicit with respect to their objectives ... Among various objectives such as price stability, growth and financial stability, the dominant objective for central banks particularly in developing countries must be price stability," he said while speaking on the topic of 'Contours of Central Banking Have They Changed' at the 93rd Annual Conference of Indian Economic Association here.

He noted that tying central banks to a specific target of inflation may be too restrictive and may even be counter productive. "However, maintenance of price stability at a level considered appropriate by central banks themselves is perhaps the best approach," he said.

Talking about the issue of inflation targeting, Rangarajan said inflation targets give greater precision to the idea of price stability and this framework would require monetary authorities to rein in inflation within targeted level.

"(However) one important question is to determine the level of inflation which should become the target ... The answer to this is a subject of substantial debate. Also the economies like India which are subject to frequent supply shocks would find it even more difficult to maintain inflation at a given level," he said.

The wholesale price index-based inflation stood at 7.48 per cent in November against 8.58 per cent in October while food inflation shot up

To 12.13 per cent for the week ended December 11.

RBI has projected that inflation is expected to come down to a level of 5.5 per cent by March 2011. A high inflation may prompt the apex bank to tight monetary policies to control the price rise, thus hitting the economic growth prospects.