Govt to unveil new monetary policy framework by January, says FinMin official

The government will unveil a new monetary policy framework by the end of January 2015, making it easier for the Reserve Bank of India (RBI) to focus on tamping down persistently high inflation, a Finance Ministry official told reporters in the national capital on Tuesday.

The official, who asked not to be identified, said the government will set a new inflation target, which will be implemented by a monetary policy panel.

The economy has long struggled with prices rising at double digit levels annually, causing most distress for the poor.

Consumer price inflation slowed to 7.8 per cent in August, making RBI more confident that a near-term target of 8 per cent inflation in January would be met.

In January, an RBI panel headed by Deputy Governor Urjit Patel recommended a policy framework that would lead to 6 per cent consumer price inflation by 2016.

An RBI panel also proposed moving to a medium-term inflation target of 4 per cent in 2014, with a band of 2 per cent on either side, when setting monetary policy, sharply below current levels.

The recommendation had stirred concern about a potential clash with the traditionally more pro-growth government. Although the central bank is not statutorily independent from the government, it has long enjoyed wide latitude in policy-making.

The reforms foresee a panel-based approach that is standard international practice but, as in Britain, would require the RBI to adhere to an inflation target set by the government, known in the jargon as operational independence.

Finance Minister Arun Jaitley, in his maiden budget in July, promised to revamp the monetary policy framework to meet the challenge of an increasingly complex economy.

"It has to be put in place not later than December-January because it is a budget announcement," the official, who did not wish to be named because of the sensitivity of the matter, told reporters.

"We have completed our internal work. And the (RBI) Governor and the Finance Secretary had some conversations."

The Finance Ministry and the central bank are soon expected to sign a formal agreement on the issue, the official said.

RBI Governor Raghuram Rajan has already said he wanted to bring down consumer price inflation to 8 per cent in January 2015 and a more difficult 6 per cent the following year, in line with the "glide path" recommended by the central bank panel.

However, the official said it was up to the government to set the new inflation target.

"What is the appropriate inflation target for India, cannot be decided by the RBI. It has to be decided by the government," he said, adding it could consult with Parliament and the central bank before setting the target.

This effectively means the RBI would not enjoy the independence enjoyed by the US Federal Reserve, which has latitude to set an inflation target as part of a broader legal mandate to achieve full employment and stable prices.

The RBI Governor sent a strong signal last week that he would refrain from cutting interest rates until he was confident the inflation target for January 2016 could be met.

(Reuters)