Rbi And Fed-Challenges

Will RBI take Fed & ECB route on road to inflation salvation?

Hit by surging food and commodity prices, inflation is a problem on both sides of the Atlantic — for the US Federal Reserve and the European Central Bank (ECB) — but their responses have been markedly different. The reason, in large part, is explained by the difference in their mandates.

Closer home, the Reserve Bank of India (RBI) is perceived as one of the most conservative central banks in the world. It has much in common with the ultra-accommodative Fed. Both have a dual mandate — growth and price stability — unlike ECB that targets only inflation. With priorities like those of the Fed and a cautionary approach like that of ECB, how will RBI chart its course?

Election or no election, price stability is important, especially when inflation is at a three-year high of more than 7%. This will be an over-arching feature when governor Y V Reddy unveils the annual monetary
policy on April 29, amidst less rosy GDP forecasts.

Around the same time next week, half way across the world, the US Fed is expected to slash its key rate by 25 basis points to 2% even as a further rate cut could spur inflation. Experts hope this would then ring in a pause for rate cuts by the Fed.

RBI has no explicit mandate for formal inflation-targeting. “The relative emphasis between maintaining price stability and growth is modulated as per the prevailing circumstances, and is articulated in the policy statements,” governor Y V Reddy has said.

This is much like in the US where the Fed is more engaged in fighting a slowdown than in taming inflation. The monthly producer price index (PPI) that tracks wholesale cost of goods and food showed prices rising at a much faster clip than in the previous months. It registered 1.1% in March, up 4% over last year. Rising prices will only add to deep housing market slump, a related credit crunch and rising job cuts. Economists feel this may prompt American consumers to cut back...