Inflation targeting important to bring macroeconomic stability: Jahangir Aziz, JPMorgan

In an interview with ET Now, Jahangir Aziz, Head-Emerging Asia Economics, JPMorgan, shares his outlook on the RBI credit policy. Excerpts:

ET Now: Are you surprised with what the RBI Governor has done?

Jahangir Aziz: Yes, I was surprised that he did the right thing. During last December’s monetary policy, the governor tried hard to justify why he did not raise the rates. However, for the first time in the last five years, I have seen the RBI putting out a 12-month horizon over which he actually wants to bring down inflation.

If the risks change in either direction, they will change the interest rate profile or the path. Hence, this is a very good policy review.

In India, if you really want to bring macroeconomic stability, the inflation targeting is the only way out. The Urjit Patel Committee report has a flexible inflation targeting.

Mythili Bhusnurmath: There is a clear fiscal dominance over the monetary policy. How do you tackle that?

Jahangir Aziz: Inflation targeting will be explicitly contingent on what happens to fiscal deficit. If the government is unwilling to or is unable to meet the 3 per cent fiscal deficit target, clearly the 8 per cent or the 4 per cent inflation target is no longer valid.

Given the fact that all inflation targets -- whether flexible, inflexible, formal, informal -- have contingencies, it is a good quantitative framework for us to at least try.

Mythili Bhusnurmath: Do you agree the RBI can do more?

Jahangir Aziz: The RBI should let banks do. It should not do the kind of guided lending or lending by guidance that China does. Sooner or later, that leads to significant stresses and imbalances in the financial sector.

However, we are getting way ahead of ourselves about this public credibility of the RBI. The RBI needs to establish credibility in the financial market.

If you do a survey in India or anywhere else in the world, no one holds the central bank responsible for inflation, it is always the government.

If the RBI did not accommodate the government’s fiscal deficit by doing OMOs, then the interest rates will rise and the government would not have the space to continue its profligacy. Hence, the RBI cannot step back and say it is a government’s fault.