NEW DELHI: Ahead of the Union Budget 2024 announcement, it is learnt that economists have suggested finance minister Nirmala Sitharaman to revisit the inflation targeting by the Reserve Bank of India. The Economists believe that the government must re-examine and, if necessary, relax the inflation targeting approach to maintain interest rates at moderate levels.
According to experts, the 4% (+-2) inflation target mandated to the Reserve Bank of India (RBI) is difficult to achieve and it also keeps interest rates higher.
“There might be some announcement on inflation targeting on July 23. A group of economists have suggested Sitharaman to revisit inflation targeting. There seems to be unanimity among those economists,” one of the sources told TNIE.
As per experts, increasing the inflation target from 4% to 6% can benefit common people by lowering borrowing costs and boosting spending. For investors, it may lead to asset value growth and profit opportunities.
“The central government assigns the inflation target that the RBI has to pursue. The inflation targeting regime, having been in operation for nearly a decade, probably needs a re-evaluation, especially after continued high interest rates due to inflation above 4%,” said Charan Singh, founder and CEO of EGROW Foundation.
“The last 30-year average shows the inflation generally hovers between 5.5% and 6.5%. India has a potential to grow 10% but persistent high rates could be detrimental to growth and employment generation. Hence, the need to re-assess the efficacy of the existing target of 4+/-2%,” Singh argued. As per former Chief Statistician of India, TCA Anant, it is a valid consideration for the government to reassess the legislative mandate established in 2016 regarding inflation targeting and contemplate adjusting target to encompass both Wholesale Price Index (WPI) and Consumer Price Index (CPI).
Dr Ashwani Mahajan, an economics professor and national co-convenor of Swadeshi Jagran Manch, says there has been a major disparity in recent years between the Consumer Price Index (CPI) and WPI, with CPI consistently higher than WPI. “Despite WPI remaining in the negative zone in the last financial year while CPI stayed elevated, the Monetary Policy Committee (MPC) adhered to CPI-focused inflation targeting as per its mandate. The Reserve Bank of India (RBI) has maintained the repo rate at 6.5% since January 2023, even with WPI showing lower or negative figures,” he argues.
Meanwhile, Madan Sabnavis, Chief Economist at Bank of Baroda said, based on average inflation in the past, 5% looks a fair number.