India retains inflation target, keeps borrowing as planned

By Siddhartha Singh and Subhadip Sircar,

India’s government will retain a 2-6 per cent inflation target for the Reserve Bank of India, putting to rest speculation that authorities will push to shift focus to economic growth.

The target is unchanged, Economic Affairs Secretary Tarun Bajaj told reporters in New Delhi Wednesday. The flexible inflation targeting regime, known as FIT, will be effective for five years through 2026.

“At the headline level, it is a clear positive as retention of the band signals policy consistency,” said Anubhuti Sahay, head of South Asia economic research at Standard Chartered Bank Plc. ”We, however, await confirmation on 4 per cent medium-term target, and in case any escape clause has been inserted to handle challenging situations like 2020.”

The government’s renewed mandate to the Reserve Bank of India ignores calls from some economists to shift or even shun the current yardstick, which they argued limited monetary policy firepower at a time when the pandemic makes support to the economy crucial. The government has also budgeted a near-record borrowing plan to spearhead investments and growth.

India will borrow 7.24 trillion rupees ($99 billion) through bonds from April to September, some 60 per cent of the full-year target. That’s in line with 60 per cent-65 per cent usually issued for the period and will probably comfort bond traders facing a glut of paper.

The RBI finds itself needing to control both inflation and yields to ensure the large borrowing plan goes through successfully. A spike in food costs last year pushed inflation beyond its 6 per cent tolerance limit, forcing policymakers to halt interest rate cuts after 115 basis points of easing. Inflation has since subsided, hovering at a 5 per cent level in February.

Also read: Centre's fiscal deficit at 76% of RE during April-February

The RBI, which is due to review interest rates next week, has been on pause mode since mid-2020 but has continued with its accommodative policy bias to support a nascent recovery. Asia’s third-largest economy is battling another wave of Covid-19 infections that pose a challenge to growth.

The central bank last month favoured retaining the original framework put in place in 2016, saying it helped anchor inflation expectations. Governor Shaktikanta Das had earlier warned that loosening the inflation goal would render the monetary policy setting ineffective.

The current band — a broad range of 400 basis points within which the central bank has sanction to operate by law — is the widest in Asia.