Mumbai: The Reserve bank of India (RBI), which had raised rates by a hefty 50 basis points last week, will not be able to deliver an inflation target in the short term because price pressures are mostly supply-driven, its governor said.
“Inflation targeting is neither feasible nor advisable in India, and for several reasons,” Duvvuri Subbarao said in a speech to the Central Bank Governance Group in Basel.
“First, in an emerging economy like ours, it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context.”
He said monetary policy transmission in India has been improving but it is still a fair bit away from best practice.
“The Reserve Bank cannot escape from the difficult challenge of weighing the growth-inflation trade off in determining its monetary policy stance,” he said.
Structural bottlenecks that are beyond the scope of monetary policy make fast-growing India especially vulnerable to bouts of elevated inflation like in recent weeks.
Headline inflation surged to nearly 9% in March, far above forecasts and is expected to remain around these levels in the April-September period according to the central bank’s policy projections.
The central bank has raised key interest rates nine times since mid-March last year, but inflation has remained stubbornly high.
While the RBI does not have an official inflation target, its perceived comfort zone is around 5%. The central bank expects inflation to ease gradually to 6% by end-March 2012.