Inflation Targeting Remains The Benchmark For MPC
By Ashwini Agarwal
First publised on 2021-04-02 08:20:35
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The government has done well not to tinker with the inflation targeting framework of the monetary policy. It has decided that for the next five years, till March 31, 2026, the framework will remain unchanged with the target of inflation being in the range of 4% plus/minus 2%. Macroeconomic stability must be the keyword for the government and it has righty considered that in taking this decision.
In these difficult times, when the economy is rebounding from the pandemic-induced disruptions, stability in financial markets is of utmost importance to attract investments. Although a lot of suggestions were made by experts to suitably change or modify the framework or include other variables in it, the government rightly did not do so.
Inflation targeting has served monetary policy well in the last five years. Although supply side disruptions in the last financial year resulted in inflation being higher than the threshold prescribed by the MPC, that was mainly due to the lockdown. With the second wave of Covid infections currently on, inflation might surge again if local lockdowns result in disrupting the supply chain. But that will be factored in by the MPC. The only problem now is that with inflation remaining above the threshold, the MPC is not able to ease interest rates further. But since it is continuing with its accommodative stance, once the pandemic situation improves and there are no further supply side disruptions, inflation is bound to come down.
Apart from contraction in the core sector, most other economic indicators are showing huge improvement every month since the festival season in October. A record Rs 1.24 lakh crore GST collection has been reported in March. Exports were up by 58% and imports by 53%. The economy is rebounding. There is no need to tinker with policy. The need now is for the government to invest in infrastructure to give a push to the core sector. With indirect tax collections improving, the government must now move fast on divestment to get the funds and invest.
