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India’s inflation targeting framework kept unchanged for next five years – Mint

The government has kept the inflation targeting framework for the central bank as it is without any change for the five year period beginning 1 April, 2021. “Inflation targeting for 2021-2026 period is kept at the same level as the previous five years,” economic affairs secretary Tarun Bajaj told reporters on Wednesday. When asked whether core inflation has been introduced as an additional index to monitor, Bajaj replied in the negative. “It is the same,” he said.

The central bank has supported maintaining the existing inflation target of 4% within a band of 2 percentage points.

“The current numerical framework for defining price stability, i.e., an inflation target of 4 per cent with a +/-2 per cent tolerance band, is appropriate for the next five years,” Reserve Bank said in a report on currency and finance (RCF) for the year 2020-21 released in February.

The report said that the “period of study in this report is from October 2016 to March 2020 commencing with the formal operationalisation of the flexible inflation targeting (FIT) framework in India but excluding the period of the COVID-19 pandemic in view of data distortions.”

The six-member MPC, headed by the RBI Governor, decides on the monetary policy keeping in mind this inflation target band.

Indiaʼs CPI rose to 5% in February, from 4.1% in January as the pace of food and fuel price rises accelerated to 3.87% and 3.53%, respectively. The central bank’s latest monetary policy in February had cautioned that the slowing of inflation could be short-lived with increased pass-through to output prices as demand normalizes and firms regain pricing power. It marginally raised the inflation forecast to 5-5.2% from 4.6-5.2% for the first half of the next fiscal year while drawing comfort from slower food inflation.

Moody’s Analytics in a report released on Tuesday said inflation is worrisome in India. “Retail inflation has held above the Reserve Bank of Indiaʼs 4% target for the past eight months. Indiaʼs core CPI (excludes food, fuel and light) was up 5.6% in February, from 5.3% in January. Volatile food prices and rising oil prices led Indiaʼs CPI to exceed the upper band of 6% several times in 2020, inhibiting the RBIʼs ability to keep accommodative monetary settings in place during the height of the pandemic. Higher fuel prices will keep upward pressure on headline CPI and keep the RBI from offering further rate cuts,” it added.

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