Former RBI Guv C Rangarajan bats for continuation of flexible inflation targeting regime

The 5 year mandate to RBI to keep inflation between 2-6 percent ends in March 2021. Since both the mandate and the external member's finish one term, the governor is right in ordering an internal review of how the monetary policy has worked under the inflation targeting mandate.

CNBC-TV18's Latha Venkatesh spoke with former RBI governor C Rangarajan to review the working of the monetary policy framework.

When asked if India should persist with inflation targeting framework, Rangarajan said, "I believe in the Indian context and in the context of developing economies, there is a great deal of purpose behind a flexible inflation targeting scheme. In most of the countries in the world price stability is a dominant objective of the monetary policy."

According to him, we need to make a distinction between the framework and how that framework should be operated. "As far as the framework is concerned I believe that the monetary policy framework of flexible inflation targeting is a suitable thing from the Indian context. Many people think that inflation targeting is a single objective motivated but that is not correct. Even the preamble says that the dominant objective is price stability keeping in mind the objective of growth."

Therefore it is not as if that price stability takes precedence over everything. If one were to take a look at the minutes of the monetary policy committee meetings, it is very clear that the members are talking about what the rate of growth of the economy will be in the next few quarters and it is in that particular context that the inflation trajectory is also projected. So, one is not totally independent of the other. The flexibility that is being given is essentially to emphasize the fact that there are other considerations to take into account, he said.

"I personally think that 4 percent plus or minus 2 percent gives enough flexibility. Even if inflation as it is happening right now goes beyond the 6 percent, you need to act strongly only if the monetary policy committee thinks that the inflation will remain at that level for a long time. Therefore, we will need to keep that part of the mandate as it is," he said.

As far as the implementation of the institutional arrangement is concerned, I think the word monetary policy committee (MPC) is a misnomer, it is not a monetary policy committee, it is a rate fixing committee. "I think they need to take a much larger view of not only acting on the policy rate but also are there things that can be done by monetary policy, I think that is very important if it is to be called a monetary policy committee", Rangarajan added.