Reddy warns against excessive emphasis on core inflation

MUMBAI: RBI governor YV Reddy has warned against excessive emphasis on core inflation as it could sometimes affect day-to-day policy actions.

Mr Reddy highlighted the recent example of New Zealand Central Bank adopting inflation-targeting as its monetary policy objective. The central bank there had intervened in the currency markets after several years and the system crashed, resulting in a parliamentary inquiry for the central bank’s action. “By focusing too much on core inflation, some countries have missed taking timely actions,” he said. Mr Reddy was speaking at the Indian Banks Association (IBA) annual general meeting in Mumbai on Tuesday.

One often tends to look at oil prices more as a shock or cyclical component of inflation. “But there is a permanent component in oil prices and even food prices that cannot be ignored.” He also called for use of prudential policies for anti-cyclical processes.

To rein in asset prices, macro policies have to be combined with prudential policies. This, he said, was also underscored in the recent meetings at the Bank for International Settlements. The central bank, more than a year ago, had introduced higher risk weights on real estate loans with an aim at reining in home prices.

Speaking earlier, VP Shetty, chairman, IBA, highlighted the various initiatives of the association. Besides its role in financial inclusion initiatives of commercial banks, it is also being actively involved in streamlining the payments and settlements system. It is also looking at a settlement system on the lines of single euro payments area that comes into effect in January 2008.