Govt asks RBI to maintain status quo on retail inflation targeting at 4 per cent
The government on Wednesday asked the Reserve Bank to maintain status quo on retail inflation targeting at 4 per cent with a margin of 2 per cent on either side for another five-year period ending March 2026.
“The inflation target for the period April 1, 2021 to March 31, 2026 under the Reserve Bank of India Act 1934 has been kept at the same level as it was for the previous five years,” economic affairs secretary Tarun Bajaj said.
Aditi Nayar, principal economist, Icra, said: “The continuation of the MPC’s inflation targeting band at 2-6 per cent is welcome as an upward revision could have contributed to an unanchoring of inflation expectations.”
To keep inflation under a specified level, the government in 2016 decided to set up the Monetary Policy Committee (MPC) headed by RBI governor and entrusted the panel with the task of fixing the benchmark policy rate.
The six-member MPC, which had its first meeting in October 2016, was given the mandate to maintain annual inflation at 4 per cent until March 31, 2021 with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.
The 400 basis points within which the central bank has sanction to operate is the widest in Asia, matched only by Turkey and surpassed by Argentina.
The RBI had previously faced criticism for largely overstating inflation with its forecasts used to underpin a hawkish policy stance. The recent stubborn inflation has forced the central bank to pause interest-rate cuts despite the economy needing more stimulus after entering an unprecedented recession, analysts said.
A Reserve Bank of India (RBI) working paper has recommended that maintaining the inflation target at 4 per cent is appropriate for the country.
The paper, authored by Harendra Kumar Behera and Michael Debabrata Patra, finds that there is a steady decline in trend inflation to 4.1-4.3 per cent since 2014. Setting an inflation target below the trend may impart a deflationary bias to monetary policy because it will go into overkill relative to what the economy can intrinsically bear in order to achieve the target, says the paper titled Measuring trend inflation in India.
“Analogously, 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 per cent is appropriate for India,” it said.
The Monetary Policy Committee will meet six times during the next financial year, the RBI said on Wednesday.
The first meeting of the six-member MPC to decide on the first bi-monthly monetary policy statement for 2021-22 will be held from April 5 to April 7. The policy will be announced on April 7.
The second meeting of the MPC in the next fiscal will be held on June 2, 3 and 4. The third meeting will be August 4, 5 and 6.
The fourth meeting will be from October 6 to October 8, the fifth from December 6-8 and the sixth meeting February 7-9, 2022.