FM says RBI must abide by government focus on growth

NEW DELHI Tue Feb 18, 2014 3:36pm IST

Finance Minister Palaniappan Chidambaram speaks at the Indian Private Equity and Venture Capital Association (IVCA) conclave in New Delhi July 16, 2013. REUTERS/Anindito Mukherjee/Files

Finance Minister Palaniappan Chidambaram speaks at the Indian Private Equity and Venture Capital Association (IVCA) conclave in New Delhi July 16, 2013.

Credit: Reuters/Anindito Mukherjee/Files

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NEW DELHI (Reuters) - The finance minister chided the central bank on Tuesday over its focus on fighting inflation, saying the Reserve Bank of India (RBI) also needed to abide by the government policy to promote economic growth.

The comments by P. Chidambaram came after a central bank panel last month recommended making managing inflation its main policy objective, with a goal to explicitly target consumer price inflation of 4 percent, with a 2 percent band on either side.

Opinion polls ahead of upcoming national elections - expected between April and May - predict voters will oust Chidambaram's Congress-led ruling alliance, in part over its failure to tame high food prices and revive economic growth.

RBI Governor Raghuram Rajan has maintained in recent public comments that keeping inflation under control is necessary to promote growth and rejected views of a trade-off between the two. The central bank has raised interest rates by three-quarters of a percentage point since September.

"In a developing country, this government believes, there must be a balance between price stability and growth," Chidambaram told television news channel ET NOW in an interview.

"That is a correct policy for a developing country, and a monetary authority must abide by the government's policy."

India has been caught in what some analysts say is a stagflationary environment of high inflation but low growth.

The RBI has so far made inflation the priority although it is expected to leave interest rates on hold at its next policy review on April 1 after data last week showed retail inflation slowing to a two-year low in January.

The government and the central bank have often been at odds in fighting inflation.

While the central bank has often blamed New Delhi's expansive fiscal policy and failure to ease infrastructure bottlenecks for persistently high inflation, a growth-obsessed government, at times, has found it hard to digest interest rate hikes.

"This is a kind of rhetoric which (the) finance minister is making so that during the next review there is reduction in interest rates. But the RBI is not listening," said N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy (NIPFP), a Delhi-based think tank.

RBI is not technically independent - the governor and his deputies are appointed by the government - although it generally enjoys latitude in policymaking.

Besides inflation, the RBI also has two other main objectives, economic growth and financial stability.

But taming prices is seen as having risen in priority after the RBI panel headed by deputy governor Urjit Patel recommended last month targeting consumer inflation, with an aim to bring it down to 8 percent by January 2015 and 6 percent by January 2016.

The recommendations have raised the prospect of a prolonged period of monetary tightening in Asia's third-largest economy, even as annual economic growth is stuck around a decade-low of 4.5 percent.

Chidambaram said on Tuesday the government would discuss the panel recommendations with the central bank.

"I am not telling the RBI to do this or do that," Chidambaram told ET Now.

"RBI has assured me that the Urjit Patel committee report will be discussed with the government and no decisions would be taken unilaterally."

(Reporting by Rajesh Kumar Singh and Manoj Kumar; Editing by Kim Coghill)

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