Policy rate appropriately set, says Rajan

Raghuram Rajan had said the government was on the same page as RBI, in terms of inflation targeting

Reserve Bank of India (RBI) Governor Raghuram Rajan has said its policy rate was appropriately set. Since September, Rajan has raised the repo rate thrice, by a combined 75 basis points, to manage inflationary expectations.

Rather than administer shock therapy to a weak economy, RBI preferred to disinflate over time, while being prepared to do all that was necessary if the economy deviated from the projected inflation path, Rajan said. He was addressing the Fixed Income Money Market and Derivatives Association of India-Primary Dealers' Association of India annual conference here this evening.

Rajan said the monetary policy committee wouldn't put on blinkers and see only the inflation number.

On the Urjit Patel committee's recommendations on monetary policy framework, he said though the central bank strongly favoured suggestions on targeting retail inflation, the final decision would be taken only after the government's approval. "All we have done thus far is to adopt the reasonable suggestion of the Patel committee that we focus on CPI (Consumer Price Index)-based inflation, rather than WPI (Wholesale Price Index)-based inflation as our primary objective," he said.

On the sidelines of the G20 Summit in Sydney earlier this week, Rajan had said the government was on the same page as RBI, in terms of inflation targeting.

The Patel committee has suggested reducing retail inflation to eight per cent by January 2015 and six per cent by January 2016. In January this year, retail inflation stood at 8.79 per cent.

Rajan said it seemed the committee's proposed target for six per cent inflation would be met without extreme hardship.

On the rural economy, the central bank governor said monetary policy had a direct role in containing rise in wages and some input prices by slowing the demand for labour, anchoring inflationary expectations and, therefore, moderating wage bargaining.