New Delhi, May 5 (PTI) India could consider lowering its inflation target with a narrower tolerance band if growth remains robust with stable inflation over the next five years, RBI Deputy Governor Poonam Gupta said on Tuesday.
Stating that there is “very little reason" to be moving away from the 4 per cent (+/- 2 per cent) target for now, and the current “flexible inflation targeting framework may continue if global conditions remain challenging.
Addressing an NCAER seminar, Gupta said India’s financial sector and macroeconomic stability are here to stay, and added that structural reforms help a country to build buffers and be better prepared for the next crisis. “So any attention on structural reforms should not be compromised by the ongoing crisis and uncertainty that we are seeing," she said.
Talking about the West Asia crisis, Gupta said there is an excess supply in the oil market globally, and even if it takes sometime to rebuild the buffer stocks, things will normalise as soon as the current situation is better. “The world is confronting the fourth external shock in the last six years… The shock that one is facing is cyclical shock," she said.
Since the beginning of the war in West Asia on February 28, Crude oil prices have risen significantly, stoking inflation fears. Crude prices soared to a four-year high of USD 126 per barrel last week, from about the USD 73 level before the war.
The central bank has projected headline inflation to average 4.6 per cent in FY27, and flagged upside risks to inflation forecasts. As per the latest data, consumer price index (CPI) inflation rose to a one-year high of 3.4 per cent in March.
The government, in consultation with the RBI, has notified the inflation target framework for a five-year period through March 2031. As per the framework, the Reserve Bank has to keep inflation at 4 per cent (+/-2 per cent) from FY27-FY31.
Gupta said the frequency and intensity of external shocks that the economy has been facing the tolerance band for inflation targeting remains quite valid.
“India’s own experience and international experiences convey that a plus-minus 2 per cent band has served the aim. Especially providing the flexibility needed to absorb large external shocks which have been impacting us, and they don’t seem to be abating," she said.
The next review for the inflation targeting framework of the RBI is due in 2030-31.
“If growth-inflation mix evolves as it has in the past 10 years in the sense that we continue to have robust growth and lower and more stable inflation, perhaps one could consider going the way other economies have gone. Perhaps there would be a case to lower the level and narrow the band, but much would depend on the experience of the next four years, which would be taken as input into the next review. But even with all the other outcomes being what they are, there is also merit in continuity," Gupta said while presenting her paper on the inflation targeting framework.
The RBI Deputy Governor also said that the Indian economy has become more resilient to external shocks in the last 5 years and growth has become stable overtime.
“If you look at India’s growth numbers now, a bad year is 5.8-6 per cent, a good year is 8 per cent. So the band within which growth moves now has come down," Gupta said, adding that resilience of agriculture sector has increased. PTI JD HVA