New RBI framework: Flexibility is key

We welcome the government's decision to sign an agreement with the Reserve Bank of India (RBI) that states that the objective of monetary policy is to primarily maintain price stability, while keeping in mind the objective of growth. We have ourselves long argued for a flexible inflation targeting framework, of this kind, that has sufficient degrees of freedom to react to the large number of supply and oil shocks that hit inflation in the Indian context. After all, Governor Bimal Jalan's multiple indicator approach spearheaded recovery while keeping inflation in check, in the early 2000s. In any case, RBI has enjoyed a popular mandate for fighting inflation since Governor C Rangarajan's times in the late 1990s.

RBI should shortly shift to the 14-day repo rate as the operating target from the call money rate as recommended by the Urjit Patel committee. With fixed rate LAF (liquidity adjustment facility) repos diminishing, it has already expectedly moved to daily repo auctions from weekly auctions to stabilise money markets.

Another option is to accord banks greater flexibility by cutting down their daily minimum reserve requirements.

Looking ahead, we await the constitution of the monetary policy committee when the 1934 RBI Act is put up for amendment. We believe the composition will be an amalgamation of the Justice Sri Krishna's FSLRC (Financial Sector Legislative Reforms Commission) report and the Urjit Patel committee's recommendations.

We continue to expect Governor Raghuram Rajan to cut rates by 25 basis points on April 7 and June and 100 basis points by April 2016 to support growth. After all, Finance Minister Arun Jaitley's Budget 2015 expectedly stuck to the path of fiscal consolidation.

Inflation is also well set on the below six per cent January 2016 target specified in yesterday's agreement with global commodity prices coming off on Fed tightening and the rupee stabilising with RBI buying forex reserves.

The author is India economist at Bank of America Merrill Lynch. Views are personal.