The Centre on Friday formally reaffirmed the 4 per cent inflation goal that the government and the Reserve Bank of India (RBI) had earlier agreed to target. As part of the formal notification of the statutory and institutionalised framework for a Monetary Policy Committee (MPC), the government has set an upper limit of 6 per cent and lower limit of 2 per cent as the bounds that monetary authorities need to aim at while taking policy actions. The present target will be in effect till March 31, 2021. “The key advantage of a range around a target is that it allows the MPC to recognise the short run trade-offs between inflation and growth but enables it to pursue the inflation target in long run over the course of business cycle,” the government said in a statement, following the tabling of the notification in the Rajya Sabha by junior finance minister Arjun Ram Meghwal. The government also notified what would constitute a failure of monetary policy, and the actions to be taken following such a failure.
“It is a good idea to have a band in a country where food is such a large part of the inflation basket and is so volatile,” D.K. Joshi, Chief Economist at Crisil, told The Hindu. “It gives enough flexibility to the central bank.” The RBI had in June kept benchmark interest rates unchanged citing among other factors influencing its policy stance, “a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects).” Outgoing central bank Governor Raghuram Rajan is scheduled to present the next bimonthly statement on August 9, before his three-year term ends on September 4.
The government has specified that if retail inflation remains outside the 2-6 per cent range for three consecutive quarters, then this would constitute a failure to achieve the inflation target.
“Where RBI fails to meet the inflation target, in terms of the provisions of RBI Act, it shall set out a report to the Central Government stating the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by RBI; and an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions,” the official statement said.
Given the several factors — both internal and external — that affect inflation, experts opine that the RBI must work in tandem with the government.
“The RBI has to coordinate with the fiscal authorities,” D.K. Srivastava, Chief Policy Advisor, EY India said. “Inflation is an outcome of global factors, fiscal factors, and monetary factors. These are not something the RBI can fully determine on its own.”
Consumer price inflation in June was 5.8 per cent, very near the upper limit of the band set by the government. This, coupled with the fact that the effect of the monsoon is not yet fully known, implies that it is highly unlikely the RBI will cut interest rates at its next policy meeting, according to economists.
“The chances of a rate cut are almost absent,” Mr. Srivastava said.
“The RBI will wait for the outcome of the monsoon. It will not do anything in the next meeting, because the monsoon data will come in only by October or November. They will wait for food prices to go down, which is expected to happen due to the good monsoon so far.”