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India’s inflation targeting framework remained unchanged for the next five years

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The government has kept the inflation targeting framework for the central bank as is without any changes for the five-year period starting April 1, 2021.

“Inflation targeting for the period 2021-2026 under the Reserve Bank of India Act of 1924 has been maintained at the same level as it was in the previous five years. There is no change, ”the Secretary of Economic Affairs of the Ministry of Finance, Tarun Bajaj, told reporters on Wednesday.

When asked if core inflation had been introduced as an additional index to watch as some experts advised, Bajaj replied in the negative. “It’s the same thing,” he added.

The central bank has supported keeping the current inflation target of 4% within a range of 2 percentage points. “The current numerical framework for defining price stability, i.e. an inflation target of 4% with a tolerance range of +/- 2%, is appropriate for the next five years,” said the Reserve Bank in a Currency and Finance (RCF) report for the year 2020-21 released in February. However, he had also suggested that some aspects of the framework be reconsidered, including the time horizon for achieving the inflation target and the process for selecting GPP members.

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The six-member MPC, headed by the Governor of the RBI, decides monetary policy with this inflation target range in mind.

Madhavi Arora, Senior Economist at Emkay Global, said that if the Flexible Inflation Targeting (FIT) regime had achieved its goal and also indirectly gave MPC more independence, it might have been worth revisiting the framework. in a broader sense, especially since the current crisis uncovered the limitations and inadequacies of FIT amid various political puzzles such as economic asymmetry and rates; unequal relationship between interest rates, liquidity and inflation; and political trade-offs in variables such as the external sector, REIT flows, financial stability, etc. “A more pragmatic and integrated approach can still be the answer to interrelated policy objectives,” she added.

Bajaj said the government will bring forward its borrowing schedule for FY22 and borrow 60% of Target of 12.55 trillion gross borrowings for fiscal year 22. “In the first half of the year, we would borrow 7.24 trillion dollars in the first six months, or 60.06% of gross issuance of year FY22. It will be in all segments, ie 2 years, 5 years, 10 years, 14 years, 30 years and 40 years on the titles ”, he added.

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However, Bajaj said he does not anticipate any pressure on yields due to the rising level of inflation and hopes the central bank will take the necessary steps to keep the cost of borrowing within limits.

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India’s CPI rose to 5% in February, from 4.1% in January, as the pace of the rise in food and fuel prices accelerated to 3.87% and 3.53%, respectively. The central bank’s latest monetary policy in February warned that the slowdown in inflation could be short-lived with increased spillover to output prices as demand normalizes and companies regain their fixing power. prices. He slightly raised the inflation forecast to 5-5.2%, from 4.6-5.2% for the first half of the following year, while taking advantage of the slowdown in food inflation.

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Moody’s Analytics, in a report released Tuesday, said inflation was of concern in India. “Retail inflation has held above the Reserve Bank of India’s 4% target for the past eight months. India’s core CPI (excluding food, fuel and light) rose 5.6% in February, from 5.3% in January. Food price volatility and rising oil prices have led India’s CPI to break through the upper 6% band on several occasions in 2020, inhibiting the RBI’s ability to keep monetary parameters in place at most accommodating. height of the pandemic. Rising fuel prices will keep upward pressure on the headline CPI and prevent the RBI from offering further rate cuts, ”he added.

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