Govt. retains 4% inflation target for RBI’s rate panel for 2021-26

Centre’s decision ensures ‘continuity’, ends speculation over price stability goals

Updated - March 31, 2021 11:46 pm IST

Published - March 31, 2021 11:04 pm IST - NEW DELHI

Clear focus : The Centre has agreed with RBI officials’ view that the current inflation target is appropriate.

Clear focus : The Centre has agreed with RBI officials’ view that the current inflation target is appropriate.

The Centre has decided to retain the inflation target of 4%, with a tolerance band of +/- 2 percentage points for the Monetary Policy Committee of the Reserve Bank of India for the coming five years, a top finance ministry official said on Wednesday.

“The inflation target for the period April 1, 2021, to March 31, 2026, under the Reserve Bank of India Act, 1924, has been kept at the same level as it was for the previous five years,” said Economic Affairs Secretary Tarun Bajaj. “So there’s no change,” he added.

He dismissed queries on whether the focus had shifted to core inflation or any other component of retail inflation and hinted that the framework would remain ‘the same’ as earlier.

Economists welcomed the continuity in the framework, despite the recent spate of high inflation prints beyond the 6% upper threshold of the inflation target.

“The range of 2%-6% as a flexible inflation target has worked reasonably well and continuing with the same target would not disturb the monetary policy framework as such going forward,” said M. Govinda Rao, member Fourteenth Finance Commission and former director of the National Institute of Public Finance and Policy. “Inflation may have breached the 6% mark a few times recently, but this has been during an exceptional situation in the economy,” he added.

The ministry’s decision has put to rest speculation about the government considering a looser inflation target for the central bank to enable a more growth-oriented focus in monetary policy notwithstanding the high inflation witnessed over recent months. The retention of the 4% target also suggests the government is in agreement with RBI officials that the inflation goal need not be tinkered with.

In the RBI’s Report on Currency and Finance for 2020-21, issued in February, officials stressed that “the current numerical framework for defining price stability, i.e., an inflation target of 4% with a +/- 2% tolerance band” was appropriate for the next five years.

And in December, Michael D. Patra, the central bank’s deputy governor overseeing monetary policy, and co-author Harendra Kumar Behera had pointed out in a paper: “Central to the design and conduct of monetary policy is the concept of trend inflation, the level to which actual inflation outcomes are expected to converge after short run fluctuations from a variety of sources die out.”

Citing a steady decline in trend inflation to 4.1-4.3% since 2014, the paper’s authors posited that a target set too “below the trend imparts a deflationary bias to monetary policy because it will go into overkill relative to what the economy can intrinsically bear in order to achieve the target. Analogously, a target that is fixed above trend renders monetary policy too expansionary and prone to inflationary shocks and unanchored expectations”.

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