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Indianomics: Experts discuss RBI's inflation targeting framework

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Indianomics: Experts discuss RBI's inflation targeting framework

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A just published Reserve Bank of India (RBI) working paper argues that according to a model prepared by the central bank's research staff, India's trend inflation since 2014 has been between 4.1 and 4.3 percent until COVID struck. The paper concludes that the MPC should therefore continue to target an inflation of 4 percent. It argued "if it ain't broke why fix it".

Should the inflation targeting framework be renewed for 5 more years, why this question now? A just published Reserve Bank of India (RBI) working paper argues that according to a model prepared by the central bank's research staff, India's trend inflation since 2014 has been between 4.1 and 4.3 percent until COVID struck. The paper concludes that the MPC should therefore continue to target an inflation of 4 percent. It argued "if it ain't broke why fix it".

This is not just another RBI paper. The paper is co-authored by Michael Patra who is an RBI DG and member of the Monetary Policy Committee (MPC) and he was also a member of the Urjit Patel committee, which recommended inflation targeting by RBI and recommended an inflation target of 4 percent.
Secondly, the monetary policy framework comes up for review in March 2021. Hence this paper trigger the most important questions, which will have a bearing on monetary policy for the next 5 years.
CNBC-TV18’s Latha Venkatesh discussed this with Soumya Kanti Ghosh, Group Chief Economic Adviser of State Bank of India, Chief Economist at Aditya Birla Group Ajit Ranade and Ananth Narayan Professor at SP Jain Institute of Management and Research.
Soumya Kanti Ghosh said, “That gives us this exact impression that the central banks wants to continue with the current regime of interest rate targeting. Just if we take a step back I think this is a communication which is very nuanced, very specific and very timely. By saying that inflation targeting 4 percent is the target from that point of view it is a perfect communication, at the appropriate time just to set the market expectations right. This will actually do a lot of good to the market expectations in terms of alignment.”
Ananth Narayan said, “I am not a great fan of flexible inflation targeting but even I will grant some of the positives it has brought about. First, it has brought about credibility, second, it has kept the government out of the RBI’s heir and the third positive angle is the carrot-and-stick that the FIT provides to the government that you keep inflation and the financial stability under check and I will give you lower interest rates has worked very well.”
“I don’t have a problem with targeting 2-6 percent as the sole target for RBI or MPC, I think it brings a lot of credibility if you have one target and say 2-6 percent. My problem is with the simplicity of the tools that the RBI act defines for achieving that target.”
Watch this full interview for more.
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