India favours easing inflation aim to support growth

  • India’s government is considering recommending a looser inflation target for the central bank, allowing it to focus more on economic growth despite price pressures, according to people familiar with the matter.
  • A CPI band tracked by the RBI may be relaxed further from the current 2%-6% range, said the people, who asked not to be identified citing rules.
  • The government still needs to hold consultations with the central bank before finalizing a new framework sometime 2021. The current mandate, set in 2016, requires the RBI to keep headline inflation at the 4% midpoint of its target range.
  • The Finance ministry is of the view that the RBI cannot be saddled with a rigid inflation targeting framework, especially in situations when growth needs to be pushed, the people said.
  • RBI Governor Shaktikanta Das said on 4 Dec 20 that a final call on what measure to target rests with the government and the Parliament, although he doesn’t see a situation where they will move away from tracking the CPI.
  • The RBI has previously faced criticism for largely overstating inflation, forecasts that were then used to underpin the MPC’s hawkish policy stance in 2018.
  • Currently, a spike in inflation has forced the central bank to pause interest-rate cuts despite the economy needing more stimulus after entering an unprecedented recession.

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