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Govt keeps inflation target at 2-6% for 5 years: DEA secretary Tarun Bajaj Economists welcome decision but argue for a higher upper limit
The Centre, on Wednesday, kept the inflation target of the monetary policy framework unchanged at 2-6 percent for the next five years, until the fiscal year 2025-26. The 4 percent anchor point target for inflation -- with an upper tolerance limit of 6 percent and a lower limit of 2 percent, measured in terms of a consumer price index (CPI)-based inflation -- was set by the government in consultation with the Reserve Bank of India (RBI) in 2016 and its validity expired on Wednesday. “We decided to keep the inflation target as it is for the next five years,”' said Economic Affairs Secretary Tarun Bajaj. However, core inflation has not been added to the mandate. Economists welcomed the government’s decision. “The decision to maintain the flexible inflation targeting framework in its entirety is good news as it will help provide stability and allow the monetary policy committee (MPC) to continue in its endeavor of pushing inflation expectations down toward the 4 percent headline CPI target in the years ahead,” said Kaushik Das, India chief economist, Deutsche Bank. “While core inflation has not been added as a separate variable within the inflation-targeting framework, we think that in reality, MPC members will put a lot of emphasis on the evolving core inflation trend (as they have been doing in the past, as well) to inform their monetary policy decisions in the future,” Das said. Madan Sabnavis, the chief economist of CARE Ratings, also lauded the decision but said a higher tolerance was preferable. “A higher upper band could have been considered as future inflation would be greater than 5 percent
once the economy is in the expected growth phase. This can cause asymmetry in the MPC’s reaction to inflation, especially if it crosses 6 percent often. Can we raise interest rates then?” Sabnavis said.