Under governor Urjit Patel, the Reserve Bank of India (RBI) will target inflation of 4 percent, three officials familiar with its thinking said, adopting a narrower reading of its mandate than markets in a bid to stamp out rampant price rises of the past.
The differing interpretations of amendments to last year's RBI Act reflect sometimes strained relations between the market and the central bank, and are proving a test for Patel some eight months into his tenure.
The amendments were part of landmark changes to India's monetary policy pushed by Patel, then deputy governor, and his predecessor as governor, Raghuram Rajan, and require the RBI "to contain inflation within the specified target level" of 4 percent, but within a tolerated band of 2-6 percent.
Markets have interpreted that as the range of 2-6 percent, arguing that pursuing a specific 4 percent target takes away the flexibility needed in an economy that must grow by at least 8 percent a year to allow for full employment.
But the RBI is determined to chase the 4 percent figure, the officials said, as Patel and the other five members of his monetary policy committee (MPC) seek to defend the RBI's credibility on inflation.