India needs to be careful with inflation targeting - former RBI chief Subbarao | Reuters - Firstpost
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India needs to be careful with inflation targeting - former RBI chief Subbarao | Reuters

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MUMBAI India should avoid fixating on an inflation target given the need to ensure economic growth and financial stability, former central bank governor Duvvuri Subbarao warned on Tuesday.

Inflation targeting, unveiled in January 2014, is a key legacy of Reserve Bank of India Governor Raghuram Rajan, who succeeded Subbarao in 2013 and will step down next month.

Prime Minister Narendra Modi may not name a successor until after Rajan's last policy meeting next month, sources say, and speculation is swirling over whether that person will press ahead with his main policy reforms.

The use of the consumer inflation target - currently at 2 to 6 percent - continues to spark debate among policymakers about the trade-offs for an economy that needs to grow at least 8 percent year-on-year to provide for full employment.

"You shouldn't be so fixated on the target that you ignore other concerns like growth and financial stability," Subbarao said in a interview with Reuters.

Subbarao, who was RBI governor from 2008 to 2013 after a career in the government, added that inflation in India is driven by oil and food prices, which are vulnerable to supply shocks and are not easily controlled through monetary policy.

Subbarao also stressed the importance of leaving politics out of the selection of the next RBI chief.

"I think they (the government) will look for more of expertise, experience‎ and personality traits rather than any commitment to one political point of view or another political point of view," he said.

"That's always been the case in selecting governors of the Reserve Bank of India. I don't believe that this time around it will be any different."

Rajan's unexpected departure followed criticism of his policy decisions and his forays into politically sensitive topics from some members of Modi's party.

Subbarao, who now teaches at National University of Singapore, defended his successor, saying RBI governors need the freedom to speak their minds.

"People who critique the governor talking about issues beyond the central bank domain should keep in view in what context he has spoken about the issues," he said. "I don't think there is any conflict as long as it is said in good faith."

In his just published book of his RBI tenure - "Who moved my interest rate" - Subbarao recounted the pressure he felt by the government to cut rates during his tenure, which was marked by the global financial crisis in 2008 and the rupee turmoil in 2013.

(Editing by Kim Coghill)

This story has not been edited by Firstpost staff and is generated by auto-feed.

First Published On : Jul 26, 2016 20:04 IST

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