RBI Governor Raghuram Rajan, dubbed an inflation hawk by his critics, today ruled out a blind fight against inflation, saying a single-minded focus on price rises, regardless of its consequences on growth, is not the remit of any "reasonable central bank".
"I don't want to say in any way that RBI is going to become nutters on inflation," said Rajan in his customary post-policy media interaction here.
Ruling out inflation targeting in the strict sense of the word, Rajan said the domestic context does not allow him to single-mindedly focus on inflation as growth is also a concern.
"For any reasonable central bank, while looking at achieving reasonable level of inflation it also has to take into account the growth situation, because growth itself will create some dis-inflationary forces and therefore it means you can achieve the inflation target less of an interest rate hike," he said.
Since assuming office on September 4, Rajan has hiked the key repo rate by 25 bps each on September 20 and today, taking the short-term lending rates to 7.75 per cent.
However, Rajan said the immediate focus of the central bank is to tame inflation, especially since core CPI inflation has been on the rise, which he described as really "worrisome."
He also said core CPI inflation, or price rise stripped of food and fuel, is treading at 8.6 per cent, which is not an acceptable level. This shows that consumer prices are driven more by services.
"The RBI has said it clearly again and again that it is worried about inflation. But I don't want do an inflation targeting because once you say the word inflation targeting, people have a single-minded focus on inflation regardless of the growth consequences," Rajan said in response to a query on inflation targeting.
The RBI Governor stated that he is mindful of growth concerns and expressed worries that there could be some downward risks to the 5 per cent GDP growth projection if the global economy falters.
"We don't want to create a situation where we drive rates so high that the economy collapses and then we have deflation rather than inflation," Rajan said.
When asked about the core focus of the RBI in its fight against inflation, RBI Governor said, though traditionally RBI has been using WPI as an indicator, "we cannot neglect CPI also," as it has been rising faster for long.
WPI rose to seven-month high in September to 6.46 per cent while CPI hovering at 9.84 per cent in the same month.
"We haven't changed the goalpost as far as WPI is concerned, but we also need to bring CPI under control for we can't live with close to double-digit CPI for an extended period of time. So, our intention is also to bring the CPI within the boundary," Rajan said.
Admitting that recent spike in WPI was partly due to food inflation and also on exchange rate depreciation besides due to fuel prices, he said: "We need to bring it within the 5 per cent norm which we enunciated in the policy."
Rajan said the Reserve Bank wanted to bring down the CPI below 9 per cent level by March, 2014.
Explaining the rationale for not putting out a target for CPI, he said: "This is a question that I will continue to avoid to answer because we want to see the impact of today's action on this, which are driven by our sense of sensitivity to CPI.
"I don't to put a goalpost of X per cent for CPI because I don't want to find that the action we have to taken today, given the state of the economy, are extreme, to achieve that goal.
"We will evolve the goalpost and we have a committee right now under deputy governor Urjit Patel that is looking at these issues--precisely what should be the goalpost for CPI and WPI, and what emphasis should we put on one and what emphasis should we put on the other," he added.
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