New Delhi, January 11: Inflation in India may finally be slowing, opening the door for the central bank to resume monetary easing and helping it push back against calls for a shake up of its policy framework.
Consumer price index figures due Tuesday are expected to show a 5 per cent increase in December from a year earlier, returning to the Reserve Bank of India’s target range of 2 to 6 per cent. Prices rose quicker than 6 per cent in 11 of the 12 prior readings, hampering the RBI’s ability to counter the pandemic-driven downturn.
The price moderation couldn’t come at a better time for central bank Governor Shaktikanta Das, with the inflation targeting mechanism that’s been in place since 2016 coming up for review this year. The RBI will give its official recommendations in an annual report due in the next few weeks.
The RBI has been gently pushing back on any changes, through working papers and statements by senior officials. It has argued the elevated headline inflation is a supply-side impact of the pandemic, not a policy flaw. Governor Das himself hinted that the headline CPI is likely to form the central target.
Meanwhile, the Flexible Inflation Targeting regime, which has been successful in anchoring expectations, is likely to stay. A recent working paper from the International Monetary Fund on 'India’s Inflation Process Before and After Flexible Inflation Targeting' found there is evidence that expectations have become more anchored since 2015.
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