Govt, not RBI, has the right to set inflation target: FM

Says CAD this year will be below $40 billion

Virtually rejecting the Urjit Patel committee’s recommendations, Finance Minister P Chidambaram said on Friday the government has the right to set a target for inflation and the Reserve Bank of India (RBI) can decide on its monetary policy in line with that goal.

“I think that is the correct approach. The sovereign has the right to set the target and then the central bank has the mandate to take steps to achieve the target. I think that there is a great degree of convergence on the way to go forward,” Chidambaram told reporters after addressing the RBI board. The finance minister added that the goal of economic stability should include price stability as well as growth.

Asked about the committee headed by RBI Deputy Governor Urjit Patel, which recommended that the central bank should set inflation targets, Chidambaram said the ministry and RBI are on the same page on the issue.

The finance minister added RBI Governor Raghuram Rajan has acknowledged it should be left to the central bank to fund ways and means to achieve the inflation target set by Parliament.  The Patel committee, formed to strengthen India’s monetary policy framework, had recommended sweeping changes such as formation of a monetary policy committee and inflation targeting. It suggested RBI primarily target four per cent inflation, with a deviation of 200 basis points. However, the finance ministry is of the view that if RBI sets the target, then it would lead to a conflict of interest.  Rajan said RBI was worried about growth as much as it was worried about inflation. “The key question is how we go about achieving high growth with low inflation.”

Chidambaram and former RBI governor D Subbarao had publicly aired differences over monetary stance of RBI. However, Rajan had said Parliament should set inflation targets for the central bank.

The finance minister said the measures taken by the RBI and the government are complementing each other and have delivered substantially the goal of stability.

“The economy certainly is more stable today than what it was 18 months ago. That is reflected in the strengthening of the rupee, that is reflected in heightened interest of investors, both FDI (foreign direct investment) and FII (foreign institutional investors),” he told reporters after addressing the board of RBI.

The finance minister also said the current account deficit (CAD) for this year would be $40 billion - lower than his Budget projection of $45 billion and less than half of $88 billion in 2013-13. He reiterated the revised fiscal target of 4.6 per cent for 2013-14 would also be met.

CAD has narrowed down to $31.1 billion or 2.3 per cent of GDP in April-December this year, against $69.8 billion or 5.2 per cent in the corresponding period of 2012-13. The reduction came on the back of pick-up in exports and restrictions in gold imports.

However, when asked about easing curbs on gold imports with reduction in CAD, he reiterated the government would revisit the matter after the final CAD numbers are out.

On GDP growth target of 4.9 per cent, Chidambaram said he went by the estimates of the Economic Division in the finance ministry and the Central Statistics Office. He said the fourth quarter must deliver higher growth in order to achieve the target of 4.9 per cent for the year.

The economy expanded by 4.7 per cent in the December quarter of 2013-14, after growing at 4.4 per cent in the first quarter and 4.8 per cent in the second. In the first nine months of the current financial year, economy grew 4.9 per cent.