| MUMBAI/NEW DELHI
MUMBAI/NEW DELHI Aug 8 India's central bank
governor Raghuram Rajan has set himself a target of lowering
consumer inflation and is even ready to raise rates to achieve
it, risking friction with the new government if he is seen as
Rajan, well known within the Reserve Bank of India (RBI) for
pragmatism, now must work with the government of Prime Minister
Narendra Modi, which understands the need for - and wants -
lower inflation, but doesn't see the value in hard targets.
The governor's people skills may be tested when Finance
Minister Arun Jaitley attends Sunday's RBI board meeting in
Delhi, representing a government that is equally keen on
boosting an economy that has just had two consecutive years of
sub-5 percent growth.
The meeting comes after Rajan, the star economist appointed
by the previous Congress government, surprised markets after the
RBI's policy review on Tuesday by establishing in clear terms
that the RBI would get consumer inflation down to 8 percent by
January 2015 and 6 percent one year later.
Officials familiar with RBI's stance warn that Rajan is
committed to those goals, even if he has yet to receive explicit
"If we don't get support from the government, then we have
to hit it harder," a senior official told Reuters.
"If inflation doesn't come down as projected and supply-side
measures are not taken, interest rates may need to go up to
reach the 6 percent goal."
NO EASY FEAT
Meeting that target won't be an easy feat in a country with
unpredictable monsoon rains and dependent on oil imports. The
consumer price index spiked to 11.2 percent in November before
three interest rate hikes from Rajan helped bring inflation down
to 7.3 percent in June.
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.
But failure to act on Rajan's pledge to bring down inflation
would hurt the central bank's credibility.
Rajan has already displayed some of his pragmatic streak by
cutting the mandatory bond reserve requirements for lenders in a
bid to help the government accomplish its goal of unleashing
"It is a credibility issue," said a second official familiar
with the central bank's policy stance.
"The government is RBI's owner, so the RBI has to consult
with the government on its executive decisions," he said,
adding: "Controlling inflation is the primary responsibility of
the central bank and it is a matter of convincing the government
that doing so is for the interest of the government and the
LIMITED ACTION SO FAR
Jaitley, in public comments, has acknowledged the importance
of bringing down inflation, and said he is committed to working
with the RBI while taking limited action such as curbing
hoarding of food staples.
But the Modi government has yet to unveil any substantial
reforms even after Jaitley surprised markets by committing to
meet an ambitious fiscal deficit target of 4.1 percent of gross
domestic product set by the previous Congress-led
Nor has the government yet endorsed the inflation targets
first unveiled in January by a central bank panel led by deputy
governor Urjit Patel.
"The finance ministry will not speak about any particular
target for inflation, but will work in tandem with the RBI to
meet the goal set by the Urjit Patel committee," said a senior
With less than 1-1/2 years until January 2016 - when
inflation is supposed to be maximum 6 percent - analysts warn
the government must work faster to tackle the supply bottlenecks
and food production problems that have so long burdened millions
of India's poor.
Meeting the January 2016 target will be "a big challenge as
that will need food inflation to fall below 6 percent," said
Soumya Kanti Ghosh, chief economic adviser at State Bank of
India, the country's largest lender.
(Additional reporting by Rajesh Kumar Singh; Writing by Rafael
Nam; Editing by Richard Borsuk)