Retail inflation target at 4±2 % |
The government of India on Aug 5 notified an inflation target of 4 per cent for the next five years, which the proposed Monetary Policy Committee (MPC) of the Reserve Bank of India will have to achieve through its interest-rate setting policies. The government has provided a margin of plus or minus 2 per cent in the retail inflation target, fixing the upper tolerance level at 6 per cent till 2021. This is a departure from the existing practice wherein the RBI Governor decides the monetary policy rates. Changes in policy rates will be done by the proposed MPC going forward, with a view to maintaining the inflation target provided by the government. The key advantage of a range around a target is that it allows 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. If the average inflation is more than the upper tolerance level of 4 per cent + 2 per cent, that is, 6 per cent, or less than the lower tolerance level of 4 per cent – 2 per cent, that is 2 per cent, for any three consecutive quarters, it would mean a failure to achieve the inflation target.
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