Government Implements 4% Inflation Target, Cementing Rajan's Legacy

The government on Friday formally implemented its central inflation target of 4 per cent, an important confirmation of the inflation-fighting policies championed by Reserve Bank of India (RBI) Governor Raghuram Rajan, who steps down next month.

Junior finance minister Arjun Ram Meghwal tabled a notification in parliament's upper house that confirmed the target at 4 per cent, plus or minus 2 per cent, in line with the goal the government originally agreed with Dr Rajan.

Candidates are also being shortlisted for the six-member monetary policy committee (MPC), a senior government official said earlier, but the panel was unlikely to be formed in time for next Tuesday's RBI policy meeting.

"All I can say is that we are currently shortlisting candidates (for the MPC). And it won't get formed before the August 9 policy," the official told Reuters, requesting anonymity, adding it may be in place in time for Rajan's departure.

Dr Rajan, a former International Monetary Fund chief economist highly regarded by financial markets, will step down on September 4 after three years at the helm of the RBI during which his policies helped to cut inflation in half.

He dropped a bombshell in June by announcing he would not seek a second term, but has sought to cement his legacy by completing the shift to formal inflation targeting and staffing up the six-member MPC before he steps down.

Some senior economists, including Dr Rajan's predecessor at the RBI Duvvuri Subbarao, have urged India not to fixate on an inflation target given the need to ensure growth and financial stability.

Intense speculation persists over the identity of Rajan's successor. Although the field has narrowed, officials in Prime Minister Narendra Modi's office have not confirmed whether any announcement is imminent.