July 24, 2019

The rationale of the central bank’s mandate on inflation

Niranjan Rajadhyaksha writes in Mint on whether the RBI's current inflation mandate should continue after 2021 or whether there is a case for a fresh look.

 

"There is a compelling case for another reduction of 25 basis points in policy interest rates when the Monetary Policy Committee (MPC) makes its next decision in the first week of August. Consumer prices have gone up at an average annual rate of 3% in the 12 months to June, a percentage point below the central point of the inflation target. The Reserve Bank of India (RBI) has not only cut interest rates by 75 basis points this year, but has also kept the money market in surplus liquidity mode to help policy transmission.

 

Meanwhile, economic growth in the fourth quarter of the previous financial year was at its lowest in five years—and 2.2 percentage points lower than the growth rate in the first quarter. There are no immediate signs of a sharp recovery in economic momentum. The recent decline in core inflation is also an indicator of weakening domestic demand. Inflation is sequentially going up, but does not seem to be a major risk right now."

 

Read the full article here.

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