Central Bank of India to Maintain Commitment to Headline Inflation Target Prior to Upcoming Assessment, According to Sources
The Reserve Bank of India (RBI) is expected to recommend maintaining the existing inflation target for a third consecutive term, with the decision anticipated before March 2026 when the current target expires. This decision comes as the RBI considers potential tweaks to its communication strategy, but the core structure is likely to remain unchanged.
India's inflation target has been a 4% headline inflation target within a tolerance band of 2% to 6% since the adoption of the inflation targeting framework in 2016. This framework, which aims to balance price stability and growth, has been in place for over five years.
Over the past decade, inflation has stayed within the mandated band for roughly three-quarters of the time. This stability is significant, considering volatility in inflation peaked during the pandemic years.
Some stakeholders, including a state-run bank, have suggested giving more weight to core inflation, but not making it the main target. This view is shared by several economists and market participants, who favour the continuity of the existing inflation target structure.
Akshay Kumar, head of global markets at BNP Paribas, and Vivek Rajpal, Asia strategist at JB Drax Honore, both support the continuation of targeting headline inflation. They argue that given the significant contribution of food and fuel to the consumer price index (CPI) basket, it makes sense to maintain this approach.
The RBI's discussion paper had considered the shift from headline inflation to core inflation as an option. However, the high volatility in Indian inflation largely coming from food prices suggests that targeting headline inflation remains relevant, as India aims to grow faster than developed market peers with the 4% midpoint target.
The RBI sought views from economists, market participants, and other stakeholders regarding the continuation of the existing inflation target structure. In response, most respondents supported the continuation of the existing structure of the inflation target.
Looking ahead, the consumer price index basket is expected to undergo a review next year, potentially reducing future volatility due to a decline in the weightage of food. This review could influence the RBI's future decisions on the inflation target.
In conclusion, the RBI is set to retain the existing inflation target for a third consecutive term, reflecting a consensus among stakeholders that the current structure remains effective in balancing price stability and growth.
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