The Reserve Bank of India (RBI) also strongly favours targeting CPI inflation but a formal adoption of the same will happen only after government approval, he said. (Agencies)
"Note that the RBI is committed to getting the strongest growth possible; there is no difference between us and North Block on this," Rajan, who has hiked rates thrice since taking over as Governor in September, said.
North Block, which houses the Ministry of Finance, has not been pleased with the Reserve Bank's rate increases, given their impact on investor sentiment and growth in general.
He said that even though some people may believe that in the short-run, the RBI's rate hikes may impact growth, the best way for a Central bank to generate growth is to bring down inflation.
"Sooner or later, the public always understands what the central bank is doing, whether for the good or for the bad,” he said.
URJIT PATEL'S COMMITTEE SUGGESTION
On inflation, he said although the Central bank strongly favours the Urjit Patel's committee suggestion on targeting CPI inflation, a formal adoption of the same will happen only after government approval.
The remark comes within days of stating that RBI's view on inflation is aligned with that of the government.
After the G20 meeting in Sydney on Monday, Rajan had told a TV channel that RBI view on inflation targeting was in sync with the government view on inflation management.
"We have a committee which has suggested a target, which is also by the way, consistent with the process the Finance Ministry's committee has suggested, so there is no disagreement about the broader need to get a framework in place," Rajan had said.
"All we have done thus far is to adopt the reasonable suggestion of the Patel committee that we focus on CPI inflation rather than WPI inflation as our primary objective," he said at a Fimmda-PDAI conference.
The Patel committee has given a glided path for CPI inflation at 8 percent by January 2015 and 6 percent by January 2016. Rajan said the Patel committee suggestion of a time horizon to glide down to 6 percent inflation seems doable without extreme hardship.
"The Patel committee report is out there for public comment and debate, and once we collect and analyze comments, we will take an internal view and then start deliberations with the government," Rajan said.
"If the eventual decision of the government, in consultation with the Reserve Bank, is to adopt the recommendations of the CFSR, FSLRC and the Patel committees, and focus on some form of an inflation objective, it would be good for the medium term inflation target to be set by the executive or the legislature, presumably based on advice from the Reserve Bank and other experts from the Reserve Bank," the Governor said.
On the business community's demands for rate cuts, Rajan said the RBI does not believe a cut will lead to more investment.
CURRENT POLICY RATES APPROPRIATE
He also stressed that the current policy rates are appropriately set, hinting at a possible pause to rate hike cycle in near term.
"As of now, we believe the rate is appropriately set… If we do raise policy rates substantially, banks will also have to raise rates to match us. While this may lead to a collapse in demand and bring inflation down quickly, it will cause significant damage to the economy,” he said.
On the sticky food inflation front, he attributed it to rising rural wages and administered food prices, and called for an end to the frequent hikes in minimum support prices by the government and also called amending the APMC Act.
"Food prices should be determined by the market and minimum support prices should be used to provide only a lower level of support so that production decisions do not get distorted or the price wage spiral accentuated. This means limiting the pace of MSP increases going forward," Rajan said.
On APMC Act, he said: "There is a need to reduce the wedge between what the farmer gets and what is paid by the household by reducing the role, number, and monopoly power of middlemen (amend APMC Acts), as well as by improving logistics."
Dwelling on the causes for high food inflation, Rajan said an increase in food production costs, primarily rural wage inflation, has also resulted in elevated food inflation.
"Some of that is an increase in real wages, needed to attract labour to agriculture, away from construction, education, household work or MGNREGA," the Governor said.
The Reserve Bank of India (RBI) also strongly favours targeting CPI inflation but a formal adoption of the same will happen only after government approval, he said.