INFLATION TARGETTING: ALSO REGULATE INTEREST RATES

Also regulate interest rates

This refers to the report “Inflation Target may be Retained” (Economic Times, July 23). The policy formulation apparatus at Mint Road has been tampered by a blind Financial Sector Legislative Reforms Commission. The damage was controlled by the presence of one person called Dr Raghuram Rajan at the helm in RBI.
GOI forced inflation targeting on Reserve Bank of India even before there was consensus among stakeholders on the parameters that should form the basis for computing inflation! A governor whose tenure was too short to be apprehensive of any problem in meeting a target with enough leeway (4 plus or minus 2 percent) accepted the challenge. Now, experts are telling media that inflation can be controlled by changing the ‘measure’ used to quantify it.
As the main worry seems to be about ‘high interest rates’ why not go back to regulating interest rates? Such a change in approach may be necessary as banks are still targeting NIMs of 2 to 3 percent or upwards which are unsustainable in the long term in the present Indian context. Differential interest rate for different categories of savings and differential rates of interest for borrowers from different sectors and different loan size groups can help cross-subsidisation and containing the losses of banks. High risk loans should naturally fetch higher rates of interest to cover losses arising from the portfolio migrating to ‘NPA’ area.
From the policy angle also, perhaps, it would be easier to manage interest rates in the short term. This is not to argue that Reserve Bank of India’s role in keeping inflation under control should be diluted in any manner.

M G WARRIER, Mumbai

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