Experts say Urjit Patel report carries RBIs' hawkish stance

MUMBAI: Many analysts today said the Reserve Bank committee's suggestion to keep consumer inflation at the Centre of its monetary policy-making indicates the hawkish stance of the central bank going ahead.

The RBI committee, headed by Deputy Governor Urijit Patel, was set up last September to revise and strengthen the monetary policy framework.

Yesterday, in its recommendation, the committee said inflation should be the 'nominal anchor' of the monetary policy framework, and it should be defined without any ambiguity.

"These recommendations clearly carry hawkish implications. After all, the December headline CPI rate of 9.9 per cent is well above the current 7.75 per cent repo rate. In other words the real policy rate is negative at a time when inflation is above even the temporary 8 per cent target rate," global brokerage Credit Suisse said in a note.

The panel recommended using CPI inflation as the new nominal anchor, as it is the closest reflection of cost of living and inflation expectations.

The panel suggested adopting a longer-term target of 4 per cent for CPI inflation with a band of +/- 2 per cent. Given the current elevated level of CPI inflation, the panel recommended a 12-month target of 8 per cent and 24-month target of 6 per cent, before the inflation target is formally adopted.

However, some experts believe the panel recommendation for adopting monetary policy which is centred on inflation will be a shift from traditional policymaking and will also bring RBI policy calibration closer to the international practises.

"We see the RBI's shift to inflation targeting as a step in the right direction. The time span over which it can be achieved will vary according to a number of factors, such as the rains or the global growth cycle or oil prices," Bank of America Merrill Lynch said in a report.

Barclays, in a note, said for the RBI to become inflation targeting, as suggested by the panel, it needs active cooperation from the finance ministry.