RBI policy must prioritise price stability: Rangarajan

The Financial Sector Legislative Reforms Commission or the FSLRC has called for merging the Securities & Exchange Board of India (SEBI), Insurance regulatory and Development Authority (IRDA) and the pension regulator into one super regulator. It wants all the regulators including the RBI to give clear non-conflicting targets. It also wants a common redressal system for financial sector consumers that reaches the district level and finally, it wants all the regulators to have a common appellate authority.

Dr C Rangarajan, Former RBI Governor said the objectives of monetary policy have been growth and price stability amongst others, but the latter should be given priority. He further clarifies, though the RBI is saying that inflation is at an uncomfortable level, there has to be an idea about the comfortable level. Essentially, that would force monetary authority towards targeting a single number and that according to Rangarajan, can be reached through an ideal price stability.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Should the central bank be given clear inflation targets?

A: We have had multiple objectives of monetary policy even in the older days, we had growth as an objective, we had price stability as an objective and we had other objectives as well. It is very difficult for a central bank to operate with only one objective and this is particularly true of the developing economies. Therefore, growth is essential, growth is important and we cannot ignore it.

Having said that, while I would not say that we need to make inflation targeting as the only objective of monetary policy, I would still urge that the dominant objective of monetary policy is price stability. I think all other objectives need to be kept in mind but they should take a secondary place.

Q: Even assuming that inflation is the dominant goal of a central bank, is it possible to give a level like the central bank has to achieve 5 percent or it has to explain, can we give such monetary targets, such numerical targets already, are we in that stage?

A: We should move towards it but, certainly I think at any given point in time, there should be some indication or the level towards which the monetary authorities are comfortable even in the present context. The Reserve Bank of India (RBI) has been saying that the present level of inflation is uncomfortable.

If you say the present level is uncomfortable, you should have some idea what the comfortable level is. While inflation targeting clearly forces the monetary authority to move towards a single number, I would say that soft inflation targeting in the sense of moving towards an ideal price stability focus is good for the monetary authorities. I would urge that it becomes the dominant objective of monetary policy.

More to come.

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