India should keep headline inflation as target: RBI External Interest Rate Committee | Business and Politics News

Headline inflation has a direct impact on Indians and should be maintained as the target of monetary policy rather than shifting to core inflation, external members of the central bank's interest rate panel said. Reuters.

The government's official annual economic report last month suggested that inflation should not be targeted at volatile food prices, which are more likely to be driven by supply constraints, an idea that has sparked a debate in India over the appropriate targeting of monetary policy.

India introduced an inflation targeting framework in 2016 and set an inflation target of 4 percent for the central bank's interest rate-setting body.

That target has limited rate cuts as rising food prices have kept headline inflation above four percent even as core inflation has fallen to a record low of around three percent, prompting analysts to call on the Monetary Policy Committee (MPC) to focus on the latter.

Shashanka Bhide, an external member of the Reserve Bank of India's MPC, said it was necessary to look at the entire basket of goods to assess the actual price pressures in the economy.

“If we use a sub-basket as a target, it would not reflect the overall price pressures. If the target is only core, it should at least capture to some extent the development of food or fuel inflation, if not the volatility,” Bhide said in an interview with Reuters.

The MPC – which consists of three officials from the Reserve Bank of India and three outside members appointed by the government – ​​has kept the key interest rate at 6.5 percent for nine consecutive meetings, citing persistently high food prices.

Indian economic growth is expected to slow to 7.2 percent in the current fiscal year from 8.2 percent last year.

Jayanth Varma, a second outside MPC member who has voted for a 25 basis point rate cut in four consecutive meetings, told Reuters that while he supported rate cuts, as an MPC member he would not comment on whether the target needed to be changed because it was a government directive that the MPC had to follow.

“It would be inappropriate for the MPC to propose a change in the targets when high food inflation makes it difficult to achieve the targets,” he said.

“One of the key questions for the MPC is whether high food inflation could spill over into core inflation, and this concern would remain if the target were changed to core inflation,” Varma added.

Ashima Goyal, the third external member who also voted for a cut at two meetings, said studies had shown that India's headline inflation rate was converging on core inflation in the long run.

“Headline inflation has the biggest impact on the public. But I think the MPC should pay more attention to core inflation,” she said.

The current Rates Committee has struggled for most of its term with inflation above its target of 4 percent due to high food and fuel prices.

Goyal said if the MPC had targeted core inflation, it would have opened up scope for lower interest rates. Varma disagreed, saying the numerical value of the core inflation target could have been different, so it was not possible to say with certainty where the repo rate would be.

First published: August 25, 2024 | 9:41 am IS