RBI, FinMin in sync to reduce inflation to 6%
Aug 11 2014 , New Delhi
“Just now we started preliminary discussions on monetary policy framework,” RBI governor Raghuram Rajan told reporters after finance minister Arun Jaitley’s customary post-budget address to the RBI board on Sunday.
Reserve Bank of India kept the key policy rate -- repo rate -- unchanged at 8 per cent in its monetary policy review last week. This is the third time in a row key rates were kept unchanged. RBI has also said it would bring down retail inflation to 6 per cent by March 2016, a target set by the Urjit Patel committee
Rajan said cut in the statutory liquidity ratio (SLR) will not impact government's borrowing costs as credit demand remains muted. RBI brought down SLR by half a percentage point to 22 per cent.
On inflation targeting, Jaitley said RBI’s last two monetary policy reviews gave a clear statement.
Rajan said the reason bank credit to industry is not picking up is because a lot of borrowing is done by industry from the market. Reduction in SLR will be useful as new demand for bank credit picks up.
Asked about RBI targeting 8 per cent CPI inflation by year-end, Jaitley said, “I think we have given all the guidance. The RBI monetary policy is on target and the current interest rate is on course. This is an issue that RBI decides and I am sure they factor in various circumstances.”
The CPI inflation was down to 7.3 per cent in June. But unpredictable monsoon and oil price spike due to worsening situation in Iraq could push up retail inflation in the next few months.
Rajan said, "As of now, we think the policy (to contain retail inflation) is on target. We (RBI's policy measures) are contingent on the data coming in."
The policy regime, Jaitley said in his address to the RBI board, was being geared to attain higher growth, lower inflation and sustainable external balance in the backdrop of sub-five per cent growth in last two fiscal years.
Later, RBI in a statement said that while addressing the board, the finance minister stressed that the policy regime was being geared to attain higher growth, lower inflation and sustainable external balance in the backdrop of sub-five per cent growth in last two financial years. The RBI board reviewed the current economic situation, global and domestic challenges and policy responses.
Jaitley also told the board that tax incentives have been enhanced to promote household savings and measures are being taken to accelerate credit flows to infrastructure and promote agriculture growth.
To a question on the bribery scandal allegedly involving Syndicate Bank CMD S K Jain and vice chairman and managing director of Bhushan Steel Neeraj Singal, Jaitley said “You do not need fresh policies. What has happened was in contravention of existing policies. It is a crime. The bank already knows what it has to do. If some stringent action is needed, it has to be done. Now it is a matter of investigation, which is on.”
The CBI had on Thursday arrested Singal in connection with the Rs 50 lakh bribery scandal involving Jain.
(With PTI inputs)