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The headline inflation target for the Reserve Bank of India’s Monetary Policy Committee has been kept unchanged at 4(+/-2) percent for the next five years, Economic Affairs Secretary Tarun Bajaj said on March 31.
While the official gazette notification is still awaited, this means that the MPC now has the mandate to take steps under monetary policy and inflation targeting frameworks to keep consumer price index-based inflation in the 2-6 per cent range from 2021-22 till 2025-26.
“The inflation target from April 1, 2021 to March 31, 2026, under the Reserve Bank of India Act, has been kept at the same level as it was for previous five years. There is no change,” Bajaj said at the end of his media briefing on the centre’s borrowing plans for April-September.
Moneycontrol had reported on March 16 that the centre will likely give an unchanged inflation target to the MPC. The official notification will provide greater clarity on whether more weightage has been given to core non-food inflation, which remains high, while CPI inflation has been below the 6 per cent upper limit since December due to cooling food prices.
“Our forecast for 2021-22 is that headline retail inflation will stay below 6 per cent,” said a top government official.
The RBI and the Finance Ministry have been on the same page regarding keeping the targets unchanged. In fact, in late February, the RBI said in a report that it favours keeping the current inflation targeting regime unchanged, saying it has been effective in containing price-growth.
“The experience with successfully maintaining price stability and the gains in credibility for monetary policy since the institution of the targeting framework, barring the COVID-19 period, needs to be reinforced in the coming years,” RBI Governor Shaktikanta Das had said in early February.
A number of analysts and economists have echoed these views, of the need to maintain inflation target stability, especially as the economy seeks to bounce back from the Covid-19 pandemic.
The government’s own belief that the targets should remain unchanged is illustrated by its deflator assumptions for the coming year. “We are assuming a nominal GDP growth of 14.4 per cent in 2021-22, and a real GDP growth of just above 10 per cent. That is a deflator of roughly 4 per cent,” the official quoted above said.
Roughly speaking, a ‘deflator’ would be two-thirds Consumer Price Index-based inflation and one-third Wholesale Price Index-based inflation. The target given to the MPC is for CPI.
From January-November 2020, CPI Inflation tracked below the MPC’s existing upper target limit of 6 per cent just once, at 5.84 per cent in March. It was consistently higher than that from April-November and touched the highest of 7.61 per cent in October.
Since December 2020, it has comfortably been below the 6 per cent limit. CPI inflation did rise to a three-month high of 5.03 per cent in February 2021, largely due to a spike in food prices.
However, a bigger concern has been WPI inflation, which rose to a 27-month high in February due to a broad-based hardening of prices of fuels, food items, and manufactured goods. However, diesel, which indirectly impacts prices of other items, continued to see deflation (a fall in prices), in February, albeit at a much lower rate than witnessed in the previous months. Analysts expect WPI inflation to harden further but expect CPI inflation to stay below 6 per cent in the coming months.
