The government is considering loosening the current flexible-inflation targeting framework currently being followed by the Reserve Bank of India, according to a report by Bloomberg, where it cites people familiar with the matter.
The measure is being adopted to ease the burden on the RBI on price pressures and focus on growth. "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 report quotes the people saying.
The report, however, does not delve into the technicalities behind this step.
This development follows the monetary policy announcement by RBI Governor Shaktikanta Das on December 4, where he stated that the Monetary Policy Committee was of the view that inflation would remain elevated in his address. He also highlighted that that it limits the monetary policy at the current juncture from being able to support growth.
In a press conference on the same day, Das entertained a few questions from journalists on inflation-targeting linked to the Consumer Price Index (CPI inflation) as a framework being followed by the RBI. A reporter asked him that if inflation-targeting in India has effectively been junked given inflation was above 6% for close to the past three quarters. He denied this, and went on to reiterate the importance of inflation-targeting for the RBI. Another reporter asked him if the Wholesale Price Index (WPI) would be introduced as an inflation anchor along with the CPI. Das said that it was not under the consideration of the RBI but would be done by the government and Parliament, and he did not see a switch over to the WPI.
Read the transcript of the interaction here.
Inflation targeting in India
India has been following a flexible inflation targeting framework since 2016, according to an agreement signed between the RBI, then led by Governor Raghuram Rajan, and the Government of India represented by the Ministry of Finance.
According to the agreement, the RBI would keep medium term inflation measured by the CPI at 4% within a bracket of 2 percentage points on either side (4% +/- 2 percentage points).
It would be considered that the RBI has failed to meet the target if inflation is more than 6% or less than 2% for three consecutive quarters. In case the RBI fails to meet the target, it would be answerable to the central government on the reasons behind it and how it intends on reorienting itself with these goals.
Read the agreement here.
What is inflation-targeting?
Inflation-targeting serves as nominal anchor to economy, which helps tie down the price level, according to the International Monetary Fund.
Initial nominal anchors used were currency pegs, which was phased out after countries were forced to find a new anchor once they started moving to flexible exchange rate systems. Another anchor used was to control money supply in the economy, which eventually became unstable due to innovations in financial markets.
Inflation-targeting allows central banks to use monetary policy tools according to the targets set by the government and the prevailing rates of inflation in the economy. The target could be fixed, which could act as an upper limit for inflation, like Japan at 2%, or the United Kingdom and Sweden having point targets of 2% each. These targets could also take the form of a midpoint around which the inflation percentage could float, like India, and Canada (2% +/- 1 percentage point) or maintain it within a bracket like New Zealand (1% - 3%), which was the first country to adopt inflation-targeting in 1990.
Read Bloomberg's report here.
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