Government Must Persevere With Flexible Inflation Targeting: Viral Acharya

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Government should stick with its flexible inflation targeting framework, which has worked well, to reap the benefits over the long term, former Reserve Bank of India (RBI) deputy governor Viral Acharya said.

The central bank and the government agreed in 2015 on a policy framework that stipulated a primary objective of ensuring price stability while keeping in mind the objective of growth. That framework is due for a review in early 2021.

“Evidence seems to suggest this is a good disciplining framework with good democratic accountability. We should persevere with it,” said Mr Acharya.

He said the benefits, such as lower borrowing costs, will only be seen over time.

“I would not enter into policy adventurism by changing this right now. It’s too risky,” Mr Acharya told Reuters in an interview late on Wednesday.

The RBI has by and large been successful in keeping inflation within the mandated 2 per cent-6 per cent range. But the flexible inflation targeting policy has faced criticism recently on account of the high weighting given to food items in the inflation basket which have proven highly volatile.

CPI inflation on average has stayed above the RBI’s mandated range in recent months due to supply-side disruptions on account of a nationwide lockdown to contain the coronavirus pandemic.

And despite having spent less in relative terms than other emerging markets on direct fiscal stimulus to counter the pandemic-driven downturn, India faces a bulging fiscal deficit and a steep rise in its debt-to-GDP ratio.

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