Friday, September 22, 2023
Homecentral banksRigor and risk in India central bank reform push

Rigor and risk in India central bank reform push

The biggest overhaul of India's monetary policy in 15 years aims to tackle the nagging inflation that pushes up credit costs and stifles investment, but the changes risk imperiling already weak economic growth in the absence of broader reforms.

A central bank panel recommended sweeping changes to how the central bank runs policy, including setting a long-term inflation target of 4 percent, with wiggle room of 2 percent in either direction.

(Read more: Is India's recovery already over?)

Critics say the ideas would bring a western-style rigor to an economy with emerging market problems; supply bottlenecks, unpredictable monsoon rains and politically sensitive subsidy spending that drives up food prices.

Monetary decisions would be set by a committee – they are now made by the governor – putting the Reserve Bank of India (RBI) in line with the practice at most major central banks.

Bloomberg | Bloomberg | Getty Images

The arrangement, described by Standard Chartered Bank in India as "one of the most important steps" in at least the last 15 years, may not suit India, some argue.

"I think we need to have a strong decision-maker at this stage given the peculiarities of the macro-economic situation," said Abheek Barua, chief economist at HDFC Bank.

"And I think this kind of aping of some of the western central banks does us no good. There are huge constraints on the supply side," he said.

(Read more: Asia currencies in 2014: Survival of the fittest)

One of the biggest sources of inflation pressure in India is a bottleneck in food production and distribution. One-third of fresh food perishes before it reaches shops and unpredictable weather often adds to supply pressures. That helps explain why consumer prices are rising around 10 percent over year-earlier levels.

"Inflation targeting is done in countries which have more stable kind of pricing," Economic Affairs Secretary Arvind Mayaram said in an interview with the ETNow TV channel.

Government incentives to grow rice and wheat as part of a subsidized food program for the poor also keep prices high. Another cost pressure is widespread pilfering in government food schemes.


Most Popular