Report: India should maintain inflation target, say External Interest Rate Committee members

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

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 just the core, it should also capture to some extent the development of food or fuel inflation, if not the volatility,” Bhide said in an interview with Reuters.

The RBI noted that policy must continue to be actively disinflationary to ensure that inflation remains anchored at its target level. In the MPC minutes released on August 22, the central bank noted that headline inflation rose to 5.1 percent in June as food inflation pressures increased, offsetting the impact of subdued core inflation (CPI excluding food and fuel) and fuel deflation.

Jayanth Varma, a second outside MPC member who voted for a 25 basis point rate cut in four consecutive meetings, told Reuters that one of the key questions for the MPC was whether high food inflation would spill over into core inflation.

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

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

Even though food inflation remains high, the RBI's rate panel noted that price stability and robust growth had created scope for a clearly inflation-focused monetary policy.

On future indicators, the RBI noted that headline inflation is expected to be lower in July and the second quarter of the current fiscal year due to its base effect advantage. However, with food inflation pressures showing little sign of abating in the near term and household inflation expectations rising, monetary policy needs to remain vigilant to avoid any potential impact of food price pressures on core components.

“Inflation is gradually declining, but the pace is slow and uneven. A sustained convergence of inflation to the target of 4.0 percent is still a long way off. Persistent food inflation is adding stickiness to headline inflation,” said RBI Governor Shaktikanta Das.

Earlier this month, the RBI MPC decided to keep the key repo rate unchanged at 6.50 percent for the ninth consecutive month.