New Monetary Policy Framework Under Way

NEW DELHI: The government on Sunday left it to RBI to decide on interest rates even as the two have begun discussions on putting in place a new monetary policy framework, which is a fresh mechanism to fix rates.

While the government wants Parliament to set the inflation target under the proposed plan, RBI has already gone ahead and begun work towards a glide path, which targets 8% retail inflation by next January and 6% by January 2016.

On Sunday, finance minister Arun Jaitley, who spoke at the RBI board meeting, did not comment directly on RBI's plan but made it clear that it was the central bank, which will decide on rates. "On last two occasions RBI has announced its policy on interest rates, I had, on the same evening, issued clear statement. I think that is very clear. This is the issue which the Reserve Bank decides and I am sure they will factor in various circumstances," he told reporters after meeting.

Although some viewed it as a "prod" from the government to cut rates, since taking charge Jaitley has maintained that RBI is the final authority on deciding when the time is ripe to tweak rates.

"Governor, RBI has already stated that RBI will not hold interest rates high any longer than is necessary and if disinflation proceeds as warranted, there will eventually be room to cut rates. Going forward, the RBI should examine the liquidity situation, inflation and growth in setting policy rates," the finance minister had said on Tuesday, when RBI had left policy rates unchanged, while signaling more liquidity infusion into the system.

After the board meeting, RBI governor Raghuram Rajan was more emphatic in saying that time was not ripe. "At this point, uncertainty is two way... Then, of course, if news come on either side we can change what the policy is. But, as of now we think the policy is on target. This is contingent on data coming in," he said.

In recent weeks, inflation, industrial production and trade data have been positive but RBI's main worry stems from food inflation due to weak monsoon rains in several parts of the country.

On the monetary policy framework, Rajan said that so far preliminary discussions have been held and indicated that a final outcome will take time.