The new monetary policy stand by the RBI is a vision document about how the central bank will implement inflation targeting in India. Rather than the usual policy stance on repo rate, the just announced policy statement is a guide to the future.
Interestingly, the declaration carefully avoids the usage of inflation targeting; but the whole document illustrates the phases of its implementation in the coming years.
RBI says that future monetary policy will be constructed on the basis of the monetary policy framework agreement between the government and the central bank.
“The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years.” –says the declaration.
In its long term vision about inflation, the policy brings a time table for the launch of inflation targeting. For the beginning the CPI target is 6 per cent for 2016 January, and will be brought down to 4 per cent by the end of 2017-18. The long term target inflation with 2 per cent band will be established thereafter.
Raghuram Rajan also indicate that a rate cut will not be made till the disinflationary momentum picks up to settle the inflation rate at the RBI’s comfortable level of 6 to 4 per cent. “The Reserve Bank will stay focussed on ensuring that the economy disinflates gradually and durably…”
Interestingly, the new policy also gives lot preconditions to the government for making any rate cut by the RBI. These include better targeting of subsidies and giving momentum to stalled investment projects by the government. “Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation.”
Based on the agreement with government the RBI proceeds that it will allow the present disinflationary process. This means that there will not be a rate cut as far as disinflationary trends led to the low inflation target of the RBI.
The hard line stand on inflation targeting is well written in the document- “the Reserve Bank’s intent is to allow the disinflationary momentum to spread through the economy, but remain vigilant about any resurgence of inflationary pressures that may destabilise the progress towards the inflation objectives set in the Agreement.”