January 26, 2014
Abstract: In its report submitted in January 2014, an RBI appointed committee has recommended that the RBI’s monetary policy must consistently target CPI inflation in India in the range of 2-6%. It is noted, however, that the fulfilment of the suggested ‘inflation targeting’ goal by the RBI would crucially require three complementary reforms in the fiscal domain, as enumerated below:
- Fiscal reforms. a quick return to a fiscal trajectory consistent with the Fiscal Responsibility and Budget Management (FRBM) Act;
- Administered price reforms. A prompt adjustment of administered prices of fuel, coal etc (because postponement of changes in administered prices distorts inflation figures); and
- Banking reforms. A cut in and reforms of SLR, a captive source of government borrowing.
The government’s commitment to carry out these reforms is vital in ensuring the success of the RBI’s ‘inflation targeting’, although it may entail some political costs.
Keywords: monetary policy; fiscal policy; RBI; inflation targeting; administered prices; SLR; FRBM Act