UPDATE 2-India central bank gets conditional support from govt for inflation target

Sun Aug 10, 2014 8:55am EDT

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By Manoj Kumar

NEW DELHI, Aug 10 (Reuters) - The Reserve Bank of India, which wants to bring retail inflation down to 6 percent, on Sunday received conditional support for this target from Finance Minister Arun Jaitley who is putting emphasis on stronger economic growth.

The central bank last Tuesday kept its policy rate unchanged for the third time in a row at 8 percent, and set a target to bring down retail inflation to 6 percent by January 2016.

The central bank's target of lowering inflation - even if it means keeping interest rates high - has raised prospects of friction with Prime Minister Narendra Modi, elected in May on his pledge to revive the economy.

"We will be discussing monetary policy framework through the course of the year. Just now we have started a preliminary discussion," central bank governor Raghuram Rajan told a news conference after a meeting of the Reserve Bank of India's board in New Delhi.

Finance Minister Jaitley, who attended the meeting, said policy is being geared towards attaining high growth, lower inflation and sustainable balances, against the backdrop of economic growth slipping below 5 percent for the last two years.

Rajan will need to tread carefully in pushing the government into action, according to analysts. Although the RBI is not statutorily independent from the finance ministry it has long enjoyed wide latitude in policy-making.

In January, a RBI panel headed by deputy bank governor Urjit Patel recommended a policy framework that would lead to 6 percent consumer price inflation by 2016.

Consumer price inflation spiked to 11.2 percent last November before three interest rate hikes ordered by Rajan helped bring inflation down to 7.3 percent in June.

The panel also proposed that government reduce its fiscal deficit to 3 percent of gross domestic product by March 2017, from 4.1 percent projected in the current fiscal year.

Rajan said more discussions would be held and the finance ministry would develop the framework.

Meeting the RBI's ambitious inflation target is not easy in a country facing a partial drought in some regions and dependent on costly oil imports.

When asked whether the government agreed with the RBI's inflation target, Jaitley avoided a direct reply.

"It is an issue which the Reserve Bank (of India) decides and I am sure they factor in various circumstances," Jaitley said.

He reminded Rajan about a statement he issued on Aug. 5 in which he asked the central bank to examine the liquidity situation, inflation and growth in setting policy rates.

He said tax incentives have been announced in the budget to encourage household savings and encourage investments to promote farm output.

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The RBI governor dashed the hopes of policy-makers in New Delhi, who have been pitching for lower interest rates to boost private investment and support economic growth.

He said the RBI's next monetary policy steps would depend on economic data, adding that current interest rates were sufficient to meet the bank's policy targets.

The current policy rates, at 8 percent, are on target as credit demand is also expected to remain muted despite a cut in banks' minimum bond holding requirements, known as the SLR, by half a percentage point to 22.0 percent, Rajan said.

"As of now we think policy is on target," he said. (Reporting by Manoj Kumar; Editing by Mayank Bhardwaj, Douglas Busvine and Stephen Powell)

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