India should keep inflation on target: RBI External Rates Committee | Economics & Policy News

Core inflation affects Indians directly and should be retained as the target for monetary policy rather than shifting to core inflation, external members of the central bank’s rate committee said. Reuters.

In the government’s official annual economic report last month, the inflation target was largely driven by supply shortages, excluding volatile food prices. This idea has fueled a debate about the right target for monetary policy in India.

India adopted an inflation targeting framework in 2016, setting an interventional inflation target of 4 percent for the central bank’s rate-setting committee.

Although core inflation has eased to a low of around 3 percent, rising food prices are targeting interest rate cuts. In the latter

RBI’s MPC external member Shashanka Bide said it is important to look at the entire consumption basket to gauge the real price pressures in the economy.

„If we use a partial basket for a target, it doesn’t reflect overall price pressures, and if the target is only central, it has to somehow capture the trend in food inflation or fuel inflation, otherwise there is no volatility,” Bide said. He said in an interview with Reuters.

The MPC — comprising three Reserve Bank of India officials and three external members appointed by the government — has kept the key repo rate steady at 6.5 percent for nine straight meetings now, citing continued high food prices.

India’s economic growth slowed to 7.2 percent in the current financial year from 8.2 percent last year.

Jayant Verma, the second outside MBC member to vote for a 25 basis point rate cut in four straight meetings, told Reuters that while he supported rate cuts, as an MBC member he would not comment on whether the target should be left unchanged. The MPC has to comply with a mandate issued by the government.

„It may not be appropriate for the MPC to recommend shifting the goal post when the high food inflation target is difficult to achieve,” he said.

„One of the key questions for the MPC is whether higher food inflation will turn into core inflation, and this concern will remain if the target is shifted to the core,” Verma added.

Ashima Goyal, the third external member who has voted for the cut for two meetings, said research shows the intervention inflation rate moving towards core inflation in India over the long term.

„Headline inflation affects the public more. But I think the MPC should focus more on core inflation,” he said.

The current rate committee has had to contend with inflation above the 4 percent target during their tenure due to high food and fuel prices.

Goyal said if the MPC was targeting core inflation, it would have left room to cut interest rates. Verma is different and the numerical value of the key inflation target may be different, so it is not possible to say with certainty where the repo rate will be.

Originally published by: August 25 2024 | 9:41 am IS