RBI Governor backs inflation targeting framework for macro stability

February 5, 2021 0 By boss


KOLKATA: Reserve Bank of India Governor Shaktikanta Das has come in favour of retaining the inflation targeting framework probably in the same band since price stability boosts investor confidence and macroeconomic stability.

RBI’s Monetary Policy Committee has been following a mandate to keep consumer price index (CPI) at 4%, with a 2% tolerance band on either side since 2016.

This is up for review for the first time. The amendment of the Reserve Bank of India Act in 2016 allows the government to set the inflation target, in consultation with RBI, once in every five years.

“The experience with successfully maintaining price stability and the gains in credibility for monetary policy since the institution of the targeting framework, barring the COVID-19 period, needs to be reinforced in the coming years,” the Governor said Friday.

After breaching the upper tolerance threshold continuously since June 2020, inflation moved below 6% in December for the first time after lockdown. CPI at over 6% wiped out possibility of repo rate cuts and attracted debate on the need to revise the inflation target. Questions were also raised on the efficiency of CPI as an anchor for monetary policy making.

“Price stability is the foundation on which the economy can strive to reach its potential in a virtuous cycle of higher financial savings and investment; reduced uncertainties for firms in investment and wage decisions; reduced term and risk premia in financial markets; and increased external competitiveness,” Das said.

An RBI research paper published in December last year showed the real time estimate of trend inflation was around 5% till the end of 2013, while it fell steadily to 4.1% in the first quarter of 2019.

“A target that is fixed above trend renders monetary policy too expansionary and prone to inflationary shocks and unanchored expectations. Hence, maintaining the inflation target at 4% is appropriate for India,” deputy governor Michael Debabrata Patra wrote in the paper, co-authored by Harendra Kumar Behera.

RBI on Friday revised the CPI projection to 5.2% for the January-March period, 5.2-5% in first half of FY22 and 4.3% for third quarter of FY22.





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