the story So Far: On the last day of FY 2020-21, the Finance Ministry announced that the inflation target for five years between April 2021 and March 2026 would remain unchanged at 4%, with an upper tolerance of 6% and a lower tolerance level of 2%. . It is the goal of retail inflation that will drive the country’s monetary policy framework and influence its decision to raise, keep or lower interest rates.
why is it important?
India switched to the inflation target-based monetary policy framework in 2015–17, with a 4% target kicking in from 2016–17. Many developed countries adopted a inflation-rate focus for policy-making or controlling money supply growth, rather than previous determinations with metrics such as currency exchange rates. Emerging economies are also gradually adopting this approach. In adopting a target for a period of five years, the central bank has the visibility and time to smoothly change and adjust its policies to achieve targeted inflation levels in the medium term instead of achieving it every month .
What is the rate of consumer price inflation?
Describing India’s inflationary trend as “worrisome”, Moody’s Analytics recently reported that volatile food prices and rising oil prices have driven India’s Consumer Price Index (CPI) several times past the 6% tolerance limit in 2020. And the main inflationary trends were rising again.
Retail inflation has remained below 6% since December 2020. However, it increased from 4.1% in January 2021 to 5% in February. Ernst & Young India Chief Policy Advisor DK Srivastava said core CPI inflation also rose to a 78-month high of 6.1% in February 2021.
While inflation hit, especially as oil prices continued to remain high, there was some speculation that the central government, whose top priority now is to revive growth in the COVID-19 epidemic economy, could lower inflation to a percentage target is. Or two. This may give the Reserve Bank of India (RBI) more room to cut interest rates, even if the inflation situation was high. That the government has avoided doing so and the abandoned inflation target has been welcomed by economists, who believe that the new framework has worked reasonably well keeping inflation in mind over the past five years. They attribute some recent examples when the upper target COVID-19 reached the peculiar nature of the shock.
What is the status of RBI on this?
The RBI had in recent months sought to continue the 4% target with a flexible tolerance limit of 2%. The 6% upper limit, it argued, is in line with global experience in countries that have a large share of food prices in consumer price inflation. Accepting inflation levels above 6% will affect the country’s growth prospects, the central bank emphasized.
Why should consumers worry about this?
Assuming the inflation target for consumers had risen above the 2% tolerance band and below it to 5%, this would have meant that the central bank’s monetary policy and the government’s fiscal stance would not necessarily have responded to suppress inflation. If the retail price rise trends will shoot past 6%.
For example, the central bank is perhaps the only major national institution that has made a pitch for both the Center and the states to cut high taxes on fuel which has led to pump prices for petrol crossings a 100 per Liter district. Retail inflation is exacerbated due to high oil prices, the central bank is unhappy because its own credibility falls under a cloud when the target is breached. If the upper limit for the inflation target had been raised to 7%, the central bank would not have felt the need to take a tax cut (yet). Thus, the goal of inflation makes the central bank a fiscal champion for consumers, which directly or indirectly raises retail prices under fiscal policies.
.
Leave a Reply