There have been media reports that the Centre is considering a proposal to raise MPC’s medium-term inflation target to 5 per cent, with a 2 per cent room on the upside and the downside.
Yet, RBI Governor Shaktikanta Das in his monetary policy statement, earlier today, appeared to have emphatically denied the need for such tinkering.
In little more than 100 words in his statement, the governor made a case for keeping the inflation target for the MPC at its current level of 4 per cent with a 2 per cent leeway on upside and downside.
“The experience with successfully maintaining price stability and gains in credibility for monetary policy since the institution of the inflation targeting framework, barring the Covid-19 period, needs to be reinforced in the coming years, even as we exit the pandemic and seek to exploit the opportunities of the post-Covid world,” Shaktikanta Das said in his statement.
The bureaucrat-turned-central banker argued that price stability provides the foundation for a virtuous cycle of higher financial savings and investment, reduces uncertainty in decision making for companies, lowers term and risk premium in financial markets and increases competitiveness of external sectors.
In a developing country like India where higher inflation is a chronic challenge, the 4 per cent inflation target for the medium term has helped anchor inflation expectations of economic actors. The main objective of an inflation-targeting regime is to ensure price stability and predictability. However, setting a precedent of tinkering with the target every five years could defeat that purpose.
From the government’s viewpoint, increasing the inflation target for the MPC for the next five years will provide the rate-setting panel greater flexibility to manoeuvre interest rate to support growth.
For an economy that has been deeply scarred by the Covid-19 pandemic, the government likely wants the fiscal and monetary policy to have as much ammunition as possible to revive economic growth and prosperity.
Yet, the central bank without so much as demanding a flexibility in its mandate has been able to shoulder much of the burden of reviving economic growth over the past 10 months before the baton was passed to the fiscal policy in the Union Budget announced on Monday.
As and when the government announces the inflation target for the next five years, one hopes it would have taken note of the governor’s message.