India’s central bank should adhere to its inflation-targeting mandate

livemint.com:

Subscribe to enjoy similar stories. Less than four years after the government concluded its review of India’s inflation-targeting regime in April 2021 and opted to keep both its target and nitty-gritty—its target range, indicator, etc—unchanged, its view of inflation targeting seems to be shifting.

After commerce and industry minister Piyush Goyal and then finance minister Nirmala Sitharaman called for lower interest rates, on Tuesday chief economic advisor (CEA) V. Anantha Nageswaran questioned the use of headline retail inflation as India’s yardstick to guide monetary policy.

Also read: Food inflation: Blame supply shortfalls as well as bad policy interventions If Goyal flayed the Reserve Bank of India’s (RBI) rate policy, saying it was a “flawed theory" that food inflation should be considered while framing it, the FM was just as forceful, calling for bank interest rates to be “far more affordable" and adding that several people found the cost of borrowing “very stressful." In contrast, the CEA stopped short of calling for a cut in interest rates. Speaking at a State Bank of India conclave, he pointed out that if the prices of just a few items are excluded—notably, TOP (tomatoes, onion and potatoes), gold and silver—then inflation falls to 4.2% (close to the mid-point of RBI’s target range of 2-6%), as against the October number of 6.2%.

The implication was clear: Monetary policy guided by a CPI shorn of TOP, gold and silver will allow for a reduction in interest rates. This is apiece with the position he championed in the latest Economic Survey, which called for targeting core inflation instead of headline.