India favours easing inflation aim to support growth

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Updated: Dec 09, 2020 5:54 PM

A consumer-price inflation band tracked by the Reserve Bank of India may be relaxed further from the current 2%-6% range, said the people, who asked not to be identified citing rules.

CPI, Retail inflation in September rises to 7.34 pc from 6.69 pc in August, consumer price index, IIP, industrial productionThe current mandate, set in 2016, requires the RBI to keep headline inflation at the 4% midpoint of its target range.

India’s government is considering recommending a looser inflation target for the central bank, allowing it to focus more on economic growth despite price pressures, according to people familiar with the matter.

A consumer-price inflation band tracked by the Reserve Bank of India may be relaxed further from the current 2%-6% range, said the people, who asked not to be identified citing rules. The government still needs to hold consultations with the central bank before finalizing a new framework sometime next year.

The current mandate, set in 2016, requires the RBI to keep headline inflation at the 4% midpoint of its target range.

The band — a broad range of 400 basis points within which the central bank has sanction to operate — is the widest in Asia, and only matched by Turkey and surpassed by Argentina.

The Finance ministry is of the view that the RBI can’t be saddled with a rigid inflation targeting framework, especially in situations when growth needs to be pushed, the people said.

A spokesperson for the Finance Ministry declined to comment, while the RBI didn’t immediately respond to an email seeking comment.

Economists like Bloomberg Economics’ Abhishek Gupta have argued in the past that the headline inflation measure used now is too volatile and the central bank should rather target core prices, which strips out oil and food costs. Food carries nearly 50% weight in the CPI basket.

RBI Governor Shaktikanta Das said Friday that a final call on what measure to target rests with the government and the Parliament, although he doesn’t see a situation where they will move away from tracking the CPI.

The RBI has previously faced criticism for largely overstating inflation, forecasts that were then used to underpin the MPC’s hawkish policy stance in 2018. Currently, a spike in inflation has forced the central bank to pause interest-rate cuts despite the economy needing more stimulus after entering an unprecedented recession.

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