Need to reduce fiscal-monetary policy mismatch

Please read my letter published in Business Standard on January 15, 2020

Happy Pongal

M G Warrier

Wrong strategy 

*Submitted version:

January 14, 2020
Chasing Inflation Target
This refers to the report “Retail inflation surges to 7.35% in Dec, a 5.5-yr high” (Business Standard, January 14). Coming three weeks will see analyses of the reasons for overshooting the upper limit of the inflation target accepted by RBI and the possible implications thereof on the February deliberations of the Monetary Policy Committee. It may be recalled that it was under the able leadership of Dr Raghuram Rajan that the statutorization of Monetary Policy Committee happened and a conservative and flexible moving inflation target of 4 plus or minus 2 percent with different milestones achievable at different points of time was accepted RBI.
The understanding was, RBI would explain the reasons for non-achievement of the inflation target, if it happens. So, in all probability, when MPC meets in February, there would be deliberations about the possible reasons for the rising trend in inflation and perhaps a plea for revision of the Inflation Target bargaining time for measures to bring the inflation down from the present level.
Government of India (GOI) will have to listen to RBI’s plea for supportive fiscal policy measures for the above efforts, as the instrument of interest rates as a weapon to manage inflation has become blunt due to various other developments in the financial sector. Perhaps, Budget 2020-21 may give some broad positive indications about what measures GOI has in mind to balance the fiscal-monetary policy mismatch. It would be perilous if GOI leaves this issue open and proceeds with the usual ‘first aid’ approach seeking further weakening the financial strength of statutory bodies like RBI and PSUs including PSBs.
M G Warrier, Mumbai


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