Mumbai: Japanese brokerage Nomura today said the Reserve Bank committee on monetary policy framework may declare ensuring price stability as the prime objective of the central banks' policy.
“We expect the committee to recommend a move towards price stability—low and stable inflation as the sole policy objective—instead of the current multiple indicator approach,” Nomura India economists Sonal Varma and Aman Mohunta said in a note.
The report noted that at present there is no nominal anchor for the monetary policy and the committee will recommend usage of consumer price inflation as the standard to gauge the price stability as against the wholesale price index now.
The RBI has been repeatedly saying that it looks at both the CPI and WPI data to arrive at monetary policy responses.
RBI Governor Raghuram Rajan had announced a series of measures, which included formation of a committee headed by deputy governor in-charge of monetary policy Urijit Patel to look into the monetary policy aspect and make it more “transparent and predictable”.
The committee is expected to submit its report by the end of this month.
Only a handful of countries such as Japan, Britain, New Zealand have a mandated inflation target. In these countries Parliament sets the inflation target for the central bank.
“In our view, the RBI will move away from WPI inflation as its primary inflation target because it largely reflects tradable goods price inflation, which is more relevant for producers and does not capture inflation in non-tradables (services), which is more relevant for consumers,” Nomura analysts said.
Nomura also expects the central bank to adopt a numerical inflation target or a sequence of targets for the monetary policy.
“A staggered and gradually falling inflation target wouldmake it appear more credible,” it added.
Nomura said there are short-term pains in this approach like rates staying high for long as a consequence of targeting CPI inflation.
“Although there would be some growth sacrifice in the near-term, a successful inflation-targeting framework should have positive medium-term benefits for the country.”
Additionally, in a departure from the current practice of technical advisory committee recommending the policy stance to the Governor, the Patel panel may recommend setting up of a monetary policy committee with voting members drawn from RBI, Ministry of Finance, corporate sector and academia.
Nomura also said the committee will decide to continue with the current stance of running the liquidity in a deficit mode and also address some concerns on the policy transmission issue, wherein banks have been accused of not transmitting RBI's policy stance in their lending rates, which results in the policy announcements not yielding the desired results.
