The structural changes and very high inflation around the world warrants a review of the Reserve Bank of India’s inflation target, according to Pranjul Bhandari.
“My own sense is that the inflation target has to be revisited at some point,” Bhandari, chief economist at HSBC Securities & Capital Markets (India) , told BQ Prime on the sidelines of the Morningstar India Summit. “There have been a lot of structural changes in the world economy in the last couple of years. Trade is changing every single day.”
“Prices around the world, especially in developed markets, are very high. So, we’ll have to see what the realistic new inflation target is. And I’m sure RBI is working on that,” she said.
The central bank had in March 2021 retained the inflation target of 4% with a tolerance band of plus or minus 2% for the Monetary Policy Committee. This target is valid till March 31, 2026.
Bhandari noted that inflation in India has been a point of vulnerability and that several shocks have occurred simultaneously. Even as the shock of higher commodity prices in March is still playing out in the system, another shock—of lower sowing due to patchy rainfall—has now occurred, she said.
The RBI will now watch data to identify its policy action. But the question, according to Bhandari, is whether the central bank will be satisfied with bringing inflation below 6%. If instead it targets 4%, the central bank will have to raise rates substantially from this point, she said.
Bhandari said it would hold the Indian economy in good stead, if the RBI allowed the rupee to depreciate in a gradual manner.