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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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