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Govt, RBI to devise monetary framework for central bank: Rajan

Govt RBI to devise monetary framework for central bank Rajan The government and the Reserve Bank of India will this year negotiate to formulate a monetary framework for the central bank that lays more emphasis on inflation, the bank’s Governor Raghuram Rajan has said.

“This year the government and the RBI will negotiate together to formulate a monetary framework for the RBI…The idea is to move towards an objective which has much more emphasis on inflation,” Rajan said in a speech in Chicago on Friday.

He said the focus for the RBI has been on controlling inflation and on creating a sound monetary framework.

The RBI Act of 1934 does not say anything about the framework that the RBI operates under, he added.

“Since 1934 we have not figured out a framework for the RBI. (It is) time we do it. The government and the RBI will do that,” he said.

Rajan reiterated that RBI is aiming to bring down the headline number to 8% by end of this year and to six% by the end of next year.

“After that the framework will start kicking in and the government will determine what level it wants inflation at, through some kind of act,” he said.

Rajan also noted that India is finally seeing growth improve, with the country’s GDP growing to 5.7% in the last quarter up from about 4.6% a year ago. He, however, cautioned that while this growth is “reassuring” there still tremendous room for further improvement.

“I do not want to jump up and down about this number. It is reassuring but we need more of it. My hope is that this year we do a (GDP growth) of 5.5%, may be a little better” and target a growth figure in the 6s next year and around 7% by 2016.

The fiscal deficit too had blown out from 2.5% to 6.5% and the government worked “very hard” to bring it down. He said the fiscal deficit is projected to come down to 4.1% this year and by 0.5% every year after 2014.

He, however, said that everything is not “hunky dory” and there is still lots that need to be done.

“After you cut the deficit the second step is fix the quality of the fiscal deficit,” he said.