India Favors Retaining RBI’s Inflation Target Program
Pedestrians wearing protective masks walk near the Reserve Bank of India headquarter building in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

India Favors Retaining RBI’s Inflation Target Program

India’s government is likely to leave the inflation targeting band for its central bank unchanged, according to people familiar with the matter, while policy makers remain focused on rising prices amid the rebound from the pandemic.

A consumer-price inflation band tracked by the Reserve Bank of India is likely to be retained at the current 2%-6% range, said the people, who asked not to be identified citing rules before the framework is finalized by March 31. The government is mulling small changes to the system, including safeguard options that offer leeway in cases of an exceptional events, they said, without providing further details.

India Favors Retaining RBI’s Inflation Target Program

A spokesperson for the Finance Ministry declined to comment, while the RBI didn’t immediately respond to an emailed request for comment.

Volatile food costs and a sustained rise in global oil led consumer prices to exceed the upper band several times last year, threatening to limit the central bank’s ability to keep monetary policy loose to help stimulate the economic recovery. The situation also posed political risks for Prime Minister Narendra Modi’s government in the run up to key state elections.

The yield on the benchmark 10-year bond has climbed about 30 basis points since early February amid growing wagers the central bank may reverse the course of its accommodative policy to curb any surge in inflation.

The current five-year mandate for flexible inflation targeting, known as FIT, requires the RBI to keep headline inflation at the 4% midpoint of its range. The 400 basis points within which the central bank has sanction to operate is the widest in Asia, and only matched by Turkey and surpassed by Argentina.

‘Effective’

The RBI last month said the existing regime is effective and recommended that the band be retained. It suggested some aspects of the framework be reviewed, including the time horizon for the bank to meet the target and the process of admitting members to the Monetary Policy Committee.

The finance ministry earlier examined options including recommending a looser inflation target for the central bank, which would allow it to focus more on economic growth despite price pressures. The government is expected to make an announcement soon as the current inflation targeting program, introduced in 2016 and valid for 5 years, expires at the end of this month.

Opposition parties have attacked Modi’s administration for failing to check the rise in cooking gas and gasoline prices. The ruling Bharatiya Janata Party faces a slew of provincial elections this year and next, including in key Uttar Pradesh state, which sends the largest number of lawmakers to the parliament.

The RBI had previously faced criticism for largely overstating inflation, with its forecasts used to underpin a hawkish policy stance in 2018. Recent stubborn inflation has forced the central bank to pause interest-rate cuts despite the economy needing more stimulus after entering an unprecedented recession.

©2021 Bloomberg L.P.

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