Inflation target of 4% may be retained in new Monetary Policy Framework

NEW DELHI: The government is veering around to the view that the current inflation target of 4% should be retained in the new Monetary Policy Framework that's being finalised, in keeping with its long-term focus and macro stability goals to boost potential growth. There had been speculation that the government could prescribe a higher target to create room for a reduction in interest rates to boost growth. "It would be kept at

the same level," said a top government official. Another government official said the new framework would be notified soon. The government signed a Monetary Policy Framework agreement with the Reserve Bank of India in February 2015, under which the central bank would aim to bring inflation based on the Consumer Price Index to below 6% by January 2016 and 4% for the financial year 2016-17 and subsequent years, with a variation of +/- 2%.

ET had reported earlier this month the Centre was in talks with RBI to rework the framework with statutory backing in line with the changes to RBI Act. The government had amended RBI Act in Budget to provide for a Monetary Policy Committee with a specific inflation goal.

Inflation target of 4% may be retained in new Monetary Policy Framework

Under Section 45ZA of RBI Act, the government, in consultation with RBI, has to notify an inflation target in terms of the Consumer Price Index every five years. Last month, the government put out the rules governing the procedure for the selection of members of the Monetary Policy Committee and the terms and conditions of their appointment. Without specifying a target, it also said that if inflation misses the "tolerance level" specified in the law for three consecutive quarters, it would constitute a failure of monetary policy. HSBC had in a report earlier this month said that "changing the target in the early days of the inflation targetting regime would undermine the credibility of the whole exercise".

In the run-up to the Budget, the government had decided to stay with a fiscal deficit target of 3.5% of GDP for the current financial year, despite a clamour to ease the road map to provide stimulus to the economy. Rating company Standard & Poor's endorsed the government's macro management.

"The authorities also clearly have their eye on the 'long game' with reforms to boost growth potential getting at least as much attention as short-term stimulus," S&P said on Thursday. Better macro balances have resulted in a big inflow of foreign investments. The government said foreign investments grew 46% after the launch of the 'Make in India' initiative.