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    Inflation target should be higher, wider: Experts

    Synopsis

    They proposed a higher headline inflation target of 5-6% accompanied by a core inflation target. This way, the monetary policy committee (MPC) could focus on either of those depending on the situation, and keep prices under control without hampering economic growth.

    Agencies
    The current inflation framework, instituted in 2016, is up for review in March next year.
    New Delhi: India needs to raise its inflation target, make the entire framework more flexible, and widen the remit of the monetary policy committee, to effectively deal with the current economic crisis and strengthen the monetary policy framework, some leading economists said.

    They proposed a higher headline inflation target of 5-6% accompanied by a core inflation target. This way, the monetary policy committee (MPC) could focus on either of those depending on the situation, and keep prices under control without hampering economic growth.

    The Reserve Bank of India should take a medium-term outlook to achieve these targets while empowering MPC with control over all monetary policy instruments rather than just the repo rate, some of the country’s top economists told ET.

    Under the current framework, the central bank is mandated to target a 4% consumer inflation with a 2 percentage point tolerance band on either side, which means effective inflation range of 2%-6%.

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    This target is stiff for an emerging economy prone to supply shocks, experts said.

    The current inflation framework, instituted in 2016, is up for review in March next year.

    Pronab Sen, former chief statistician of India, said the inflation targeting framework should incorporate a dual target, including core inflation with a much narrower band along with headline inflation.

    This way, MPC can “take a call on which target they would focus on depending upon the situation”, he said.

    “If we go ahead with the 4% target with a plus or minus band of 2%, I would then say that we have a core inflation target of 3% with a plus or minus 1% band,” Sen said.

    Madan Sabnavis, chief economist at CARE Ratings, too, said the 4% inflation target “is very aggressive because, unlike western countries, India has a lot of supply side shocks”.

    The ideal target would be higher at 5-6% considering India’s long term trend retail inflation was 5%, he said.

    Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said RBI should also take a longer term outlook to achieve inflation targets, similar to the approach taken by the Reserve Bank of Australia (RBA).

    While the central bank has successfully contained inflation at around 4% in the past couple of years, the latest retail inflation print came in at 7.34% for September, mainly due to higher food prices, largely driven by vegetables.

    “The problem was that there was too much aggressiveness on the part of the RBI on going back to the midpoint target,” Ghosh said. “The policy should be done like the RBA through a cycle rather than a point in the cycle.”

    The Australian central bank successfully contained inflation under 3% for the past 27 years, within its target of 2-3%.

    According to Sen, a major point of concern was that MPC only controls the repo rate while RBI takes decisions on liquidity and yields without consulting the policy panel.

    “When you have inflation targeting as the primary objective of the RBI, the issue that crops up is that, do you then tie monetary policy down to only a one way street? Which is to say that the MPC can only change the demand side and not affect the supply side,” Sen said.
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    2 Comments on this Story

    John 7 days ago
    Nice Article
    Am7 days ago
    inflation target should be 2% and not 5-6%. supply side variations need to be tackled by reforms
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