Indianomics: Experts discuss RBI's inflation targetting

The Reserve Bank of India (RBI) has recommended that the Monetary Policy Committee's (MPC) mandate should continue to be an inflation target of 2-6 percent. Here is the back story: RBI became an inflation targeting central bank in 2015. That year RBI and government signed an agreement setting up an MPC with 3 external members and 3 RBI members. This MPC was to set interest rates in such a way that inflation remains at 4 percent - plus or minus 2 percent – that is consumer price index (CPI) should be in 2 percent and 6 percent at all times. This mandate was for five years which ends on March 31. RBI wants the mandate extended as is for the next five years. Should the government agree? Sajjid Chinoy, Chief Economist JP Morgan India, and Niranjan Rajadhyaksha, Research Director at IDFC Institute discussed this.

“The initial five-years of inflation targeting – I would say – has been a success. Firstly, undoubtedly inflation has come down, it has trended down over these years, there have been ups and downs. I think this declining trend in inflation to some extent has cooled a bit. RBI has to be given the credit for that. Secondly, the gap between Indian inflation and international inflation has also narrowed especially in the years between 2010 and 2013-2014. That tells you a lot about macrostability and the management of the economy. So in terms of these two simple measures, core inflation trend and the differential between Indian inflation and international inflation we have done well,” said Rajadhyaksha.

“Fundamentally, in the medium-term there is no trade-off between growth and inflation. That is fundamental to inflation targeting that the best service that monetary policy makers can pay to growth in the medium-term is to keep inflation well-anchored and contained because we know high inflation is volatile inflation, it creates macroeconomic uncertainty, vitiates the investment environment, it puts downward pressure on the rupee. So let us be clear that in the medium-term there is no trade-off between growth and inflation,” Chinoy mentioned.