The new monetary policy agreement, signed with the Reserve Bank of India by Prime Minister Narendra Modi's government in 2015, expires next month.
India's inflation goal band needs to be refined to represent demand-side variables, and supply-side variables should not impact monetary policy, a senior government official said on Monday. The existing monetary policy agreement, signed with the Reserve Bank of India in 2015 by the government of Prime Minister Narendra Modi, expires next month and is expected to be changed when it is signed off for the next five-year term to provide more stability to help economic growth.
India's retail inflation, which during the previous Congress party-led government had reached double-digits, has steadily declined, allowing PM Modi to win a second term in 2019. The monetary policy target needs to be refined as central bank instruments primarily address demand-side factors, while the current inflation target has been influenced by food prices, which are mainly based on supply-side measures, Krishnamurthy Subramanian, chief economic adviser to the Ministry of Finance, said on Monday.
"I don't think that it is correct to rely on one metric," he said. Mr Subramanian suggested that core inflation, which strips out food and fuel prices, could be a better target measure, adding that there was a need to update the 2011/12 base year and revisit household consumption products to represent the shift in consumption patterns for the collection of monthly consumer price data. He said online transactions should also capture the CPI inflation data.
Food prices, which account for almost half of the consumer price index, have had a major impact on headline CPI inflation over the past year, Reuters said in an interview. Inflation returned to the Reserve Bank of India's (RBI) inflation target range of 2% to 6% in Asia's third-largest economy last month after staying above the central bank's comfort range for eight consecutive months.
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