India adopted an inflation target of 4% for next five years under the monetary policy framework as previously agreed and in line with the center’s focus on macroeconomic stability to boost growth while keeping prices in check.
The finance ministry has notified the consumer inflation target for the Reserve Bank of India until March 31, 2021, with an upper tolerance level of 6% and lower limit of 2% that was finalized in consultation with Governor Raghuram Rajan, whose term ends next month. This prepares the ground for setting up Monetary Policy Committee that will set rates in keeping with this target. RBI currently sets the rate, PTI reported.
“Fixation of an inflation target, while giving due emphasis to the objective of growth and challenges of an increasingly complex economy, is an important monetary policy reform,” the finance ministry said in a release late Friday. Inflation based on the consumer price index in June was at 5.77%, close to the upper end of the band, which all but rules out a reduction in rates in the near term.
The next monetary policy review is set for August 9, the last that will be overseen by Rajan. The decision means there’s no change in the target included in the monetary policy framework agreement between the government and RBI in February last year—4% with a range of +/-2%.
There had been some speculation about a higher inflation target being prescribed to create room for a reduction in interest rates to boost growth. Former RBI governor C. Rangarajan said the monetary policy framework was appropriate.
