No change in inflation target, says RBI Governor

 Reserve Bank Governor Raghuram Rajan on Tuesday said the 25 basis point repo rate hike will help rein in consumer price rise at under 8 per cent by next January and denied speculation that the goalposts have been shifted to retail inflation and inflation targeting has been adopted.

“We should be able to reach the 8 per cent objective (on consumer price inflation) by the end of the year with this rate hike, which in turn will aid sustainable growth in the long term,” Rajan told reporters at the customary post-policy interaction.

The Urjit Patel Committee on monetary policy framework set a retail inflation target of 8 per cent by January 2015.

The panel’s recommendations include shifting the goalposts to consumer price inflation and inflation targeting.

Rajan, however, denied that the RBI has adopted any of the suggestions formally and said it will have to be done in consultation with the government. He added that CPI inflation at 8 per cent is a very “reasonable” target.

“It is premature to say that we are moving towards inflation targeting,” he said, adding the committee’s recommendations are being studied.

He said the RBI had been focusing on both the consumer price index (CPI) and wholesale price index (WPI) inflation numbers for some time now and feels the CPI component is important because of its direct correlation with the consumer, who is getting affected the most and needs to be protected.

Rajan said that the central bank has to focus on disinflationary pressures in a weak economy.

“The 25 bps increase in the repo is needed to set the economy securely on the recommended disinflationary path,” Rajan said.

Finance costs to rise       

The central bank's move to increase repo rate by 25 basis points is aimed at controlling inflation rather than aiming for growth, say corporate chiefs and bankers.
Essar Group's president (international finance) Prabal Banerjee said,  “RBI is on the right track to control inflation. The 25 basis points repo rate hike will not make much difference to Indian corporates unless they are highly leveraged.”

Although corporate India did not expecting the RBI to slash rates and they believed it would maintain the rates at the same level. But a hike in the rate now will increase finance costs to over an average of 12 per cent for large corporates.

Big corporates like Reliance and Essar group are raising low cost funds abroad for  growth, few are investing in new capacities in view of upcoming elections, say experts.  “The idea is to take advantage of lower rates abroad and insulate the companies from volatility in the interest rates in India,”  the CFO of a realty firm said on condition of anonymity.  The corporate investment to GDP has slumped from post-2007 crisis levels of 17.3 to 10.6 per cent.