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RBI backs 4% inflation target ahead of review

Nupur Anand
·1-min read
FILE PHOTO: Reserve Bank of India logo is seen at the gate of its office in New Delhi

By Nupur Anand

MUMBAI (Reuters) - India should maintain its medium-term inflation target at 4% when it carries out a five-year review of the goal in March, two senior central bank officials recommended in a paper released on the banks's website on Monday.

Retail inflation has stayed around 7% over the last three months, as the government pumped money into the system to revive Asia's third biggest economy from the impact of the coronavirus crisis.

High food prices have also contributed to the rise, limiting the space for the Reserve Bank of India (RBI) to further ease its monetary policy.

RBI researcher Harendra Kumar Behera and Deputy Governor Michael Patra said the country's trend inflation - the long-term rate looking beyond temporary economic factors - had steadily declined to 4.1%-4.3% since 2014 until the pandemic hit.

"A target set below the trend imparts a deflationary bias to monetary policy because it will go into overkill relative to what the economy can intrinsically bear in order to achieve the target," they wrote in the paper seeking comments from the public.

"Analogously, a target that is fixed above trend renders monetary policy too expansionary and prone to inflationary shocks and unanchored expectations."

They said there was a case to stick to the inflation target of 4% because "if it ain’t broke, don’t fix it".

Maintaining its key interest rates early this month, the RBI said that "inflation targeting is uppermost in our agenda".

(Reporting by Nupur Anand; Editing by Barbara Lewis)