RBI Reviewing CPI-Targeting Framework to Gauge Effectiveness
(Bloomberg) -- India’s central bank is reviewing the framework behind monetary policy decision-making as pressure builds on authorities to do more to revive a slowing economy.
“Internally we are reviewing, we are analyzing how MPC framework has worked” since it’s been in operation, Reserve Bank of India Governor Shaktikanta Das told reporters in New Delhi on Saturday. “If required we will have a discussion and a dialog with the government.”
India in 2016 cemented into law the practice of inflation-targeting and created a monetary policy committee, overhauling a previous system where the governor had the final word on interest rates. The framework mandates the RBI to aim to keep consumer price inflation at 4%, while allowing the rate to fluctuate in a 2%-to-6% band.
Under the framework, interest rates are decided by the majority of votes in the committee of six members.
The policy has recently faced criticism with some economists asking for review given the high weighting of food items in the inflation basket, which can be very volatile in the short term. Recent data showed India’s headline inflation quickened for a sixth straight month in January to the highest since May 2014, driven mainly by costlier fuel and food.
The RBI cut interest rates five times last year, totaling 135 basis points, to spur credit demand. It paused in December after inflation started surging, and stood pat this month after consumer prices rose above 7% -- well above the central bank’s target range.
Monetary policy “transmission is slowly and steadily improving and it should improve even more in the coming months,” Das said. “The MPC decided to take a pause because inflation was very high.”
©2020 Bloomberg L.P.