Informist, Wednesday, May 18, 2022

MUMBAI – The Reserve Bank of India's targets for inflation will have to be re-estimated to be in line with changing demand-supply dynamics within the country, Deputy Governor Michael Patra said in an article in Economic and Political Weekly. 

In April 2021, the Centre, in consultation with the RBI, retained the inflation target at 4% for a five-year period till Mar 31, 2026. 

"India's inflation target of 4% is in alignment with trend inflation right up to 2019–20. As data points for the pandemic period form, this estimate will have to be updated along with those for the natural real rate of interest that was placed in the range of 1.6–1.8% in the pre-pandemic period," the article said. 

"Likewise, estimates of threshold inflation—beyond which inflation retards growth, which worked out to 6% in the pre-pandemic period, will also need re-estimation as the output gap closes," it said. 

The article, co-authored by Indranil Bhattacharyya, general manager – monetary policy department, RBI, aims to detail the central bank's 'conventional' and 'unconventional' responses to the COVID-19 pandemic and evaluate this response. 

With the onslaught of the COVID-19 pandemic in 2020, the central bank's monetary policy committee advanced its meetings for April and June to March and May that year. It cut the repo rate by 75 basis points in March and by a further 40 basis points in May.

The interest rate on the overnight fixed-rate reverse repo window was reduced cumulatively by 155 bps in three phases between March and May 2020.

In other measures, the central bank also introduced extended lending operations and asset purchase programmes to mitigate the impact of the COVID-19 pandemic on the overall economy. 

"Given the "long and variable" lags with which monetary policy operates and the gestation periods between policy decisions and outcomes, the impact of the RBI's pandemic response is still unfolding," the article said. 

"...it was the combination of framework flexibility and astute judgment that healed the economy and helped it rebound. This is the most important lesson from the conduct of monetary policy during the pandemic. Prominent in the RBI's strategy was the role of the accommodative policy stance, including with explicit time-contingent and state-contingent guidance."

While the global macroeconomic scenario will play a key role going ahead, domestic growth-inflation dynamics would remain the fulcrum on which, monetary policy would be designed.  End

Reported by Ajay Ramanathan

Edited by Shirsha Thakur

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