Rebooted RBI policy likely to focus on consumer inflation

Mumbai: The Reserve Bank of India (RBI) could soon unveil a major change in monetary policy as part of a deep review of monetary policy ordered by Reserve Bank of India Governor Raghuram Rajan after his appointment in September.

Due by the end of the month, the report is meant to issue recommendations aimed at sharpening the focus of the central bank and increasing its accountability.

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Following are the key issues likely to be highlighted:

INFLATION

The RBI is widely expected to put more emphasis on consumer price inflation, and not wholesale prices, when setting monetary policy.

The central bank could also specify its focus will be on the core consumer inflation data, which excludes fuel and food prices.

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OBJECTIVES

The RBI could make price stability its main objective, thus making clear inflation will be its priority although the central bank is expected to retain its current objectives of supporting growth and financial stability.

However, the RBI may opt not to adopt a specific inflation target.

MONETARY POLICY COMMITTEE

The panel may suggest a move to a voting panel on interest rates, similar to the U.S. Federal Reserve’s Open Market Committee. However, such a change would require parliament to amend the RBI Act.

Currently, the governor has the right to take decisions on behalf of the central bank, although he is advised by a monetary policy committee.

MONETARY POLICY TRANSMISSION

The RBI may put equal emphasis on liquidity management and interest rates for ensuring faster transmission of its monetary policy signal through banks.

While the current policy is to maintain a deficit in cash conditions for an effective monetary policy, some economists hope the report will go a step further and clarify the RBI’s liquidity management policy if India becomes a current account surplus economy flooded with dollar inflows.

The report may also suggest auctioning off to banks the government cash balances the RBI holds, in order to avoid undue volatility in the central bank’s liquidity management.

Reuters