Inflation target at 4% implies recent policy continuation: DBS

By: | Published: August 8, 2016 2:56 PM

The government fixing the retail inflation target at 4 per cent for the next five years suggests continuation of recent policy guidelines under the new RBI Governor...

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The government fixing the retail inflation target at 4 per cent for the next five years suggests continuation of recent policy guidelines under the new RBI Governor, who is expected to be named later this month, says a DBS report.

According to the global financial services major, while the decision to maintain inflation target is encouraging, achieving the 4 per cent target on a sustainable basis will be a challenge in the absence of structural reforms.

“The government’s move to stick with the 4 per cent CPI inflation target (mid-point of the 2-6 per cent range) for the next five years implies policy continuity under the new governor, who is likely to be named later this month,” the report said.

“We expect a continuation of recent policy guidance, where stance is accommodative while rates are left unchanged,” it added.

The government on August 5 notified 4 per cent inflation target with a range of plus/minus 2 per cent for the next five years under the monetary policy framework agreement with the Reserve Bank.

The notification fixes inflation target at 4 per cent with upper tolerance level of 6 per cent and lower limit of 2 per cent.

The government and the RBI had in February last year entered into a monetary policy framework agreement, under which the central bank would set the policy interest rates and aim to bring inflation below 6 per cent by January 2016 and within 4 per cent with a band of (+/-) 2 per cent for 2016-17 and all subsequent years.

“To that extent, these targets reinforce our view that the markets might be caught wrong-footed with their expectations for an overtly-accommodative monetary policy under the next Governor,” DBS said in a research note.

The Reserve Bank is scheduled to hold its policy meeting on Tuesday, the last under outgoing Governor Raghuram Rajan.

In the June policy review meet, Rajan kept interest rates unchanged, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.

The industry is still hopeful of further rate cuts from the apex bank to boost investment cycle.

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