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India central bank moves towards monetary policy overhaul

Raghuram Rajan, governor of the Reserve Bank of India (RBI), speaks during a news conference at the central bank's headquarters in Mumbai, India.
Bloomberg | Bloomberg | Getty Images
Raghuram Rajan, governor of the Reserve Bank of India (RBI), speaks during a news conference at the central bank's headquarters in Mumbai, India.

The Reserve Bank of India should make managing inflation its main objective and set monetary policy by committee, a central bank panel has recommended, a shift that would bring its practices in line with many other central banks.

The recommendations are widely expected to be accepted. They were issued late on Tuesday by the panel set up by RBI Governor Raghuram Rajan, which also recommended using consumer prices as the primary measure of price changes and setting an eventual inflation target of 4 percent.

(Read more: Is India's recovery already over?)

The reforms are aimed at making policy-setting more effective and transparent in a country that has long struggled with high inflation.

They would mark the most dramatic change implemented by the 50-year-old Rajan, a high-profile former chief economist at the International Monetary Fund, who took office on Sept. 4 with an ambitious agenda and amid high expectations.

"This is one of the most important steps taken by RBI in at least the last 15 years, when we moved away from money supply targeting to repo, reverse repo," said Samiran Chakraborty, head of research at Standard Chartered Bank in India, referring to the current policy rates.

"Since then, there has been no proper revamp in the monetary policy framework, while the economy has moved into a different inflation, growth trajectory," he said. "The world has become more integrated."

(Read more: World's richest have same wealth as 3.5 billion poorest)

In its 130-page report, the panel recommends that managing inflation take precedence over the bank's two other current main objectives of economic growth and financial stability.

If adopted, the RBI would use consumer price index inflation, which now stands at 9.87 percent, as the benchmark for targeting inflation. It would aim to pare CPI inflation to 8 percent over the next 12 months and 6 percent in the following 24 months, with an eventual target of 4 percent.

Historically, Indian policymakers have relied on the wholesale price index, which eased to a five-month low of 6.16 percent in December, and did not set a specific target. Rather, the RBI was perceived to have a comfort zone of WPI inflation of around 5 percent.

As expected, the panel recommended that monetary policy decisions be made by a committee, which would consist of five members including the governor, a deputy governor, the executive director in charge of monetary policy and two external members appointed by the RBI.

(Read more: Asia currencies in 2014: Survival of the fittest)

Currently, the RBI governor is the sole decision maker on monetary policy, though he is advised by his four deputy governors and a technical advisory committee.

Some of the proposals require legislative changes, while others can be implemented by Rajan. RBI officials were not available for further comment late on Tuesday.

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