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Economy

RBI Agrees To Meet 4% Inflation Target, + or – 2%, Starting Jan 2016

Inflation targets are now at 4% starting Jan 2016. This is now a stated goal, with the Government and the RBI agreeing on it. Plus, the RBI needs to come back to the government with reasons if it goes beyond these boundaries for three quarters, with remedial steps.

While this initially sounded like the Government was trying to interfere, this is a benign move. Having a strong inflation target is good. (Here’s the full agreement)

Monetary Policy Agreement Between RBI and Government

But this pins the responsibility entirely on the RBI. The RBI cannot affect fiscal policy. If the government has increased excise duty on petrol by 84%, and crude prices go up, the only thing the RBI can do is fret: the government has to cut duties to reduce inflation. (Fuel inflation is a good part of the CPI).

This is the operating zone (shaded) of the CPI.

image

In recent days, inflation’s been going up. And with fuel prices going up, freight rates up, we should only see a higher inflation number in the coming days (also considering that last Feb was another inflation dip).

Be warned: this is a signal to the RBI and a strong signal on rates.

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  • Phoenix says:

    Deepak,
    2 more things you might wish to write about to raise public awareness:
    1. Does this look like a debt trap ? :
    “Interest payments as a proportion of central revenue have shot up to a record 49.6 per cent, signaling an urgent need to keep the fisc under control. ”
    2. Does this look like abuse of public money ?:
    It is simply not true that the fiscal deficit has been kept high just to raise investment: far too much of the deficit is going towards administrative costs.
    Read more at:
    http://economictimes.indiatimes.com/articleshow/46415715.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
    To be this budget is beginning to look like a fiasco now. Populism and abuse of public money.

  • chandan Kumar says:

    This was always in the works and from Rajan’s side..he has been pushing for a formal inflation target for months now…had made it very clear in his interviews

  • This is generally positive. However, I have two concerns:
    1. The words “…while keeping in mind the objective of growth” were avoidable. They add unnecessary ambiguity & create scope for disputes.
    2. The ‘failure’ clause includes inflation below 2%. This presumes deflation is ‘bad’ in all situations, which is not the case! In fact, a fall in prices due to increase in productivity and output – a very likely scenario in a country like India – can cause a secular reduction in prices. What is RBI to do in such a situation?
    But on the whole, inflation targeting should be welcomed! As has been pointed out in the previous comment, Rajan has been demanding this for a long time.

  • DJ says:

    “If the government has increased excise duty on petrol by 84%, and crude prices go up, the only thing the RBI can do is fret”
    No, the RBI will be obliged to raise rates until the govt cries Mummy and then it can say look this is the law we agreed upon. If you don’t like it, fix your energy and fiscal policy,which is too loose, because I have to undo its impact with high interest rates. If you don’t like the inflation effects of imports (crude, etc) then find strategic ways of resolving it. Have a good day.
    This is how it should be.

  • kumar says:

    Just as the goverment under modi turned a voluntary ‘swacchh’ scheme into a tax-spinning opportunity, Rbi under rajan has woven his own thread to get commitments from those that are generally elusive, when it comes to shouldering blame.
    it is probably not going to make an inch of difference, for all is madness right now anyway. Each one is lying independently, now they will need to co-ordinate.
    makes no difference in the long term.

  • kumar says:

    when they say target inflation, what are they referring to? while the current inflation number is being touted as 4%, i don’t see any difference in prices of things i use, at the retail level.
    i hope they are talking about retail level, but am doubtful that it will be.