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No differences with Finance Ministry on growth: Rajan

‘Note that the RBI is committed to getting the strongest growth possible; there is no difference between us and North Block on this,’ said Rajan, who has hiked rates thrice since taking over as Governor in September.

He was speaking at a fixed income industry (Fimmda-PDAI) event here where the media was not allowed and only given a copy of the speech was available.

North Block, which houses the Ministry of Finance, has not been pleased with the Reserve Bank's rate increases, given their impact on investor sentiment and growth in general.

Rajan justified his actions, saying the best way to foster sustainable growth in the current circumstances is through monetary stability, which is bringing down inflation over a reasonable period of time. The Governor, who went against the majority view of an internal panel advising on the monetary policy and surprised all by hiking rates in January, also reiterated the central bank's determination to get retail inflation down to 8 per cent by January 2015 and 6 per cent by January 2016.

He explained that even though some people may believe that in the short-run, the RBI's rate hikes may impact growth, the best way for a central bank to generate growth is to bring down inflation.
‘Sooner or later, the public always understands what the central bank is doing, whether for the good or for the bad,’ he said.

‘Retail inflation targeting awaits Govt nod’

Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday  said that the RBI strongly favours the Urjit Patel Committee’s suggestion on targeting retail inflation but the final decision would come only after the government’s approval.

‘All we have done thus far is to adopt the reasonable suggestion of the Patel Committee that we focus on consumer price index inflation rather than wholesale price index inflation as our primary objective,’ Rajan said at the Fimmda-PDAI annual conference here.

‘The Patel Committee report is out there for public comment and debate and once we collect and analyse comments, we will take an internal view and then start deliberations with the government,’ he said. Earlier this week, Rajan had said on the sidelines of the G20 summit in Sydney that the government was on the same page as the RBI on inflation targeting.

The Patel committee has suggested bringing down CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. Retail inflation was 8.79 per cent in January. Rajan said the committee’s proposed time horizon for 6 per cent inflation seems doable without extreme hardship.

‘If the eventual decision of the government, in consultation with the Reserve Bank, is to adopt the recommendations of the Ministry, CFSR, FSLRC and the Patel committees, and focus on some form of an inflation objective, it would be good for the medium-term inflation target to be set by the executive or the legislature, presumably based on advice from the RBIand other experts from the RBI,’ the Governor said.

‘All this said, international experience suggests that ideally once the central bank’s objective is given and the operational target fixed, the government should leave the technocrats in the central bank to do their job,’ he added. He said the Patel committee does not turn the RBI into ‘nutters’ focused on bringing down inflation to the exclusion of all else, including financial stability.  Rajan said medium-term flexible inflation targeting means the monetary policy committee focuses on price increases over the medium term, being concerned about inflation that’s too high as well as too low.

‘That means it may be willing to overlook temporary inflation spikes such as this November’s inflation numbers, but also raise rates when sustained low interest rates and low inflation increase threats to financial stability  because a financial crisis could lead to deflation,’ Rajan said.

He said the monetary policy committee will not put on blinkers and watch only the inflation number. A number of emerging markets have adopted some form of targeting while others like the US Fed focus on inflation in all but name, including putting a numerical target to its goal of price stability.
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