Exclusive | Centre may give unchanged inflation targets to RBI’s Monetary Policy Committee


The Central government is likely to give an unchanged inflation target of 4 (+/-2) percent to the Reserve Bank of India’s Monetary Policy Committee, for the next five years starting 2021-22, Moneycontrol has learnt.

The amendments made to the Reserve Bank of India Act in 2016 allows the government to set the inflation target, in consultation with RBI, once in every five years.

“The inflation target is likely to remain unchanged. While core inflation remains a concern, it is offset by low food inflation. Our forecast for 2021-22 is that headline retail inflation will stay below 6 percent,” said a top government official. The inflation targeting framework for the next five years is expected to be announced any day now.

It is learnt that the RBI and the finance ministry are on the same page regarding keeping the targets unchanged. In fact, in late February, the RBI said in a report that it favours keeping the current inflation targeting regime unchanged, saying it has been effective in containing price-growth.

“The experience with successfully maintaining price stability and the gains in credibility for monetary policy since the institution of the targeting framework, barring the COVID-19 period, needs to be reinforced in the coming years,” RBI Governor Shaktikanta Das said in early February.

A number of analysts and economists have echoed these views, of the need to maintain inflation target stability, especially as the economy seeks to bounce back from the COVID-19 pandemic.

The official quoted above said that the government’s own belief that the targets should remain unchanged is illustrated by its deflator assumptions for the coming year. “We are assuming a nominal GDP growth of 14.4 percent in 2021-22, and a real GDP growth of just above 10 percent. That is a deflator of roughly 4 percent,” the official said.

Roughly speaking, a ‘deflator’ would be two-thirds Consumer Price Index-based inflation and one-third Wholesale Price Index-based inflation. The target given to the MPC is for CPI.

From January-November 2020, CPI Inflation tracked below the MPC’s existing upper target limit of 6 percent just once, at 5.84 percent in March. It was consistently higher than that from April-November and touched the highest of 7.61 percent in October.

Since December 2020, it has comfortably been below the 6 percent limit. CPI inflation did rise to a three-month high of 5.03 percent in February 2021, largely due to a spike in food prices.

However, a bigger concern has been WPI inflation, which rose to a 27-month high in February due to a broad-based hardening of prices of fuels, food items, and manufactured goods.

However, diesel, which indirectly impacts prices of other items, continued to see deflation (a fall in prices), in February, albeit at a much lower rate than witnessed in the previous months. Analysts expect WPI inflation to harden further but expect CPI inflation to stay below 6 percent in the coming months.