The CPI as nominal anchor...

Article;
Junk the Urjit Patel report.

Comment;

Urjit Patel’s Committee Report, especially the CPI as nominal anchor for targeting inflation is based on experience of the US, UK, Europe, and Japan… These countries have adopted the CPI as proper index of loss in the standard of living because we generally buy in the retail market and rarely in the wholesale market... In all the above four regions they have adopted complete price stability and full-employment as the objective of monetary-policy. Full-employment is an indicator of demand in the economy… Full-employment is more revered because of tax gains… They have sacrificed complete price stability in favor of full employment, except Japan. Nevertheless, all the above four regions, including Japan, are targeting inflation by pursuing loose monetary at home… Their inflation target is 2% and the Patel Committee is recommending a 4% inflation target with a band of 2% which means the actual target is 2% to 6%... In this range the RBI will not be bothered to raise interest rates, and, above and below the RBI will increase and decrease interest-rates, respectively, to control demand and prices. Indian target is much liberal… Inflation is a sign of economic activity which all the four regions are trying to achieve and they are targeting the CPI which has become a standard practice… But inflation, the CPI, especially in INDIA is much above the comfort zone because unemployment rate fell below the natural-rate due to aggressive monetary and fiscal policies during the recession… Everybody is targeting inflation some from up and others from down. Inflation-targeting in not new to INDIA… We have always heard that the RBI comfort zone is 4-6%, even if it is the WPI... The only issue is the CPI v/s WPI… Updated unemployment-rate data is not available for the Indian-Economy and that which is available indicates overheating… How we can ignore the unemployment rate… even if we consider the WPI we have a case for tightening… a 25 bps rate-hike is not going anyways…