India may need to review its inflation target given that prices in the rest of the world is on a rise, according to a member of the Reserve Bank's Monetary Policy Committee, which sets the key policy rates.
“As many people have flagged, if you are moving towards higher inflation rates in the rest of the world because the China factor that was keeping inflation low is moderating, then maybe, we need to rethink our long-term inflation target or could be that the (inflation) gap between India and the rest of the world will go,” Ashima Goyal said at a CII event in response to a question on why India targets inflation at 4 percent and not at 5 percent.
“The rest of the world will also have inflation at 4 percent… So, this is an area where we could see some changes as we learn what is happening,” Goyal added.
India adopted the so-called flexible inflation targeting regime in 2015 when the central government signed a pact with the Reserve Bank of India. This was followed up with the setting up of a six-membered MPC, which includes three external members and three representatives of the RBI, including the governor.
The government decides the inflation target for the rate-setting panel for a period of five years. So far, the headline consumer price index inflation target has been kept at 4 percent with a tolerance band of two percentage points on either side. The law also dictates that the MPC target inflation while supporting growth.
At the time the inflation target was set, the global rate of inflation was much lower, Goyal said at the event. Moreover, in an emerging market like India, information given by a government or a regulatory agency has a lot of weight, she said, anchoring inflation.
There have been repeated calls by the industry on raising the inflation target in India, which has historically witnessed inflation in the higher single digits.
The RBI-appointed committee, which recommended the inflation target of 4 percent with a band of two percentage points on either side in view of the vulnerability of the Indian economy to supply and external shocks and the relatively large weight of food in the consumer price index.
RBI Governor Shaktikanta Das had said last November that there was no need to change the inflation target despite the central bank's failure to keep it below the 6 percent tolerance ceiling for three consecutive quarters. Inflation above 6 percent would be detrimental to growth and also hurt investor confidence, he had said.
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