The Reserve Bank of India (RBI) Governor Shaktikanta Das on January 13 said it is too early to revisit the inflation target of 4 percent with 2 percent deviation on either side, in the current situation.
“I don’t think there is any need for any change. I would not think the target needs to be revisited,” RBI's Das said at an event in Mumbai. “It is too early to shift the goal post. The 4 percent target has a certain meaning.”
Under the rule, the Monetary policy committee (MPC) needs to keep inflation in a 2 percent-6 percent band with a target on 4 percent.
The MPC hiked key policy rates by over 2 percentage point in 2022 to fight inflation that stayed above 6 percent level for most part of last year. Inflation has eased in the last two months.
“There could be a moderation in inflation target numbers globally but it would be too soon to shift the target,” Das said.
According to the Governor, the flexibility of inflation framework facilitated the maintenance of average CPI from 2016 to 2020 and kept it around 4 percent.
Core inflation a concern
Core inflation still remaining sticky over six percent is definitely a concern, Das said. “That is not a comfortable number to deal with,” Das said, adding the RBI needs to be very vigilant on core inflation. At the moment, we have to continue focus on core inflation, the governor added.
India's headline retail inflation rate eased to a one-year low of 5.72 percent in December from 5.88 percent the previous month, data released on January 12 by the ministry of statistics and programme implementation showed. At 5.72 percent, the latest Consumer Price Index (CPI) inflation print is below the consensus estimate.
The core inflation, however, remained around 6.31%
Inaction on the part of central bank will fuel inflation, Das said, adding some amount of growth contraction can happen but that is a call every central bank needs to take based on domestic factors.
Wholesale credit to pick up
Further, Das said credit growth so far has been largely retail but my sense is that they have started receiving proposals for wholesale credit. “There are signs that wholesale credit is picking up. I think going forward we should see more wholesale demand coming up,” Das said.
Though investment demand, till now, has come from government capex, private capex is showing some signs of improvement, Das said.
“In 2020, credit demand of the large corporate sector was met with supply from the overseas market. But with banks in India providing higher interest rates and uncertainty about what the overseas banks and markets will do, focus is shifting towards domestic markets and banks,” Das said.
Governor said that the bankers have started receiving wholesale proposals from businesses and the corporate sector. “Going forward, we should see some pickup in the wholesale sector," Das said.
Das said in recent years the central bank has tightened the supervision of banks and non-banks. “We have developed early warning signals looking at the business models of banks. Overall banking culture of prudence has developed in Indian banking sector,” Das said.
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