RBI consults with finance ministry on new policy framework

By Manoj Kumar

NEW DELHI (Reuters) - The Reserve Bank of India (RBI) has started discussions with the finance ministry on a new monetary policy framework, including measures to reduce retail price inflation, Governor Raghuram Rajan said on Sunday.

The RBI last Tuesday kept its policy rate unchanged for the third time in a row at 8 percent, and set a target to bring down retail inflation to 6 percent by March 2016.

The governor's target of lowering consumer inflation - even if it means keeping interest rates high - has raised prospects of friction with Prime Minister Narendra Modi, elected in May on his pledge to revive the economy.

"We will be discussing monetary policy framework through the course of the year. Just now we have started a preliminary discussion," Rajan told a news conference after a meeting of the Reserve Bank of India's board in New Delhi.

Rajan said the finance ministry would develop the framework.

Finance Minister Arun Jaitley, who attended the board meeting, said the central bank would take a final call on its 6 percent inflation target by March 2016.

"It is an issue which the Reserve Bank (of India) decides and I am sure they factor in various circumstances," Jaitley said.

Meeting the RBI's ambitious inflation target is not an easy task in a country that is facing a partial drought in some regions and is dependent on costly oil imports.

Consumer price inflation spiked to 11.2 percent last November before three interest rate hikes ordered by Rajan helped bring inflation down to 7.3 percent in June.

On Sunday, Rajan added that RBI's next monetary policy steps would depend on economic data, adding that current interest rates were sufficient to meet the bank's policy targets.

Rajan also said a cut in the Statutory Liquidity Ratio (SLR) would not impact the government's borrowing costs as credit demand remained muted.

On Aug. 5, the Reserve Bank of India lowered banks' minimum bond holding requirements, known as the SLR, by half a percentage point to 22.0 percent to free up more money for lending, effective from Aug. 9.

(Reporting by Manoj Kumar; Editing by Mayank Bhardwaj and Douglas Busvine)