NEW DELHI, May 5: India could consider lowering the inflation target and trimming the tolerance band if GDP growth remains robust with a more stable inflation over the next five years, RBI Deputy Governor Poonam Gupta said on Tuesday.
However, if the global environment remains as challenging as it has been during the past six years, it would warrant both predictability and flexibility inherent in the existing framework, she said.
The government, after consultation with the RBI, has notified the inflation target framework for a five year period through March 31, 2031. As per the framework, the Reserve Bank has to keep inflation at 4 per cent (+/-2 per cent) from FY27-FY31.
Speaking at an NCAER seminar, Gupta said the future of the inflation targeting framework in India would depend on the combination of inflation and growth outcomes as they evolve during the next five years.
Also, the future inflation targeting framework would have to take into account the global shocks that the economy may have to weather.
“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,” she said.
“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,” Gupta said.
Going by international experiences, it would point towards a slightly lower inflation target and a slightly narrower band, Gupta said.
On retaining the 4 per cent inflation target with a 2 per cent tolerance band for 5 years through March 2031, Gupta said there is “very little reason to be moving away from this target for now.”
Gupta said the frequency and intensity of external shocks that every economy has been facing lately, perhaps the band size remains quite valid.
“India’s own experience and international experiences convey that a plus-minus 2 per cent province 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,” Gupta said.
The central bank has projected headline inflation to average 4.6 per cent in FY27. (PTI)
Follow our WhatsApp channel
