India retains headline inflation target at 4% following review
- The RBI's rate setting panel is due to deliver its next decision on April 8, after having held rates steady at its last meeting in February
NEW DELHI: India’s federal government on Wednesday retained its retail inflation target at 4%, within a comfort band of 2%-6%, according to an official notification.
The target will remain in place for five years. India adopted its inflation-targeting framework in 2016, formally tasking the Reserve Bank of India with keeping headline consumer price inflation within a band set by the government.
The framework was last reviewed in 2021.
The RBI’s Monetary Policy Committee - comprising three central bank officials and three government-appointed members - is tasked with meeting that target.
Price pressures in India are currently low, with consumer price inflation at 2.75% in February, but a surge in global oil prices and supply disruptions due to the Iran war are expected to push up inflation above 4% in the financial year beginning April.
“It’s a good decision to keep the target as well as the band unchanged.
The current band of (+/-)2% provides RBI policy flexibility to look through supply side shocks,“ said Gaura Sen Gupta, chief economist at Mumbai-based IDFC First Bank.
India’s February retail inflation accelerates to 3.21% y/y
“The West Asia crisis has added downside risk to growth and upside risk to inflation. The current inflation targeting framework gives RBI flexibility to stay on pause despite upside risk to inflation,” she said.
The RBI’s rate setting panel is due to deliver its next decision on April 8, after having held rates steady at its last meeting in February.
The Indian government’s chief economic advisor V. Anantha Nageswaran in 2024 had urged a review of the framework, citing frequent inflation spikes driven by food prices.
Nageswaran had suggested that core inflation, which strips out volatile food and energy prices, be used more to guide interest rate changes, which do not impact demand for items like food.
Since then, however, India has revamped its consumer price index, reducing the share of food in it, which economists said will limit volatility.
The central bank in a discussion paper published last year had signalled support for the existing framework, which it said had helped anchor inflation expectations.
Over the past decade, inflation has been above or below the mandated band for less than a third of the time, with volatility peaking during the pandemic years.
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