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NEW DELHI : The government has kept the inflation-targeting framework for the central bank unchanged for the five-year period beginning 1 April, ending speculation that a more relaxed inflation goal may be adopted to boost growth.

“There is no change," economic affairs secretary in the finance ministry Tarun Bajaj told reporters on Wednesday. The inflation target is reviewed every five years.

Reserve Bank of India (RBI) governor Shaktikanta Das had earlier defended the existing inflation target, contending that any further loosening would undermine the central bank’s ability to set effective monetary policy. The inflation mandate requires RBI to keep inflation at 4%, with a 2 percentage point leeway on either side.

“The current numerical framework for defining price stability, i.e., an inflation target of 4% with a +/-2 per cent tolerance band, is appropriate for the next five years," the Reserve Bank said in a report released in February. It had, however, also suggested that some aspects of the framework be reviewed, including the time horizon to meet the inflation target and the process of selecting members to the monetary policy committee (MPC).

The six-member MPC, headed by the RBI governor, decides on the monetary policy based on the inflation target.

Madhavi Arora, the lead economist at Emkay Global, said while the flexible inflation-targeting regime did serve its purpose and also indirectly gave more independence to MPC, there could have been some merit in relooking the framework in a broader sense, especially as the current crisis uncovered the limitations and inadequacies of the target. “A more pragmatic and integrated approach may still be the answer to intertwined policy objectives," she added.

Bajaj said that the government will frontload its borrowing calendar for FY22 and borrow 60% of 12.05 trillion gross borrowing target for the year. “In the first half of the year, we would be borrowing 7.24 trillion, which is 60% of the gross issuance. This will be in all the segments, that is, two years, five years, 10 years, 14 years, 30 years and 40 years securities," he added.

Bajaj said he does not foresee any pressure on yields due to rising inflation and hopes the central bank will take steps to keep borrowing cost within limits.

India’s retail inflation quickened to 5% in February from 4.1% in the previous month on higher food and fuel prices. The central bank’s latest monetary policy in February cautioned that the slowing of inflation could be short-lived with increased pass-through to output prices as demand normalizes and companies regain pricing power. It marginally raised the inflation forecast to 5-5.2% from 4.6-5.2% for the first half of the next fiscal year.

Moody’s Analytics, in a report released on Tuesday, said inflation in India is at a worrisome level. “Retail inflation has held above the Reserve Bank of India’s 4% target for the past eight months. Volatile food prices and rising oil prices led India’s CPI (Consumer Price Index) to exceed the upper band of 6% several times in 2020, inhibiting RBI’s ability to keep accommodative monetary settings in place during the height of the pandemic. Higher fuel prices will keep upward pressure on headline CPI and keep RBI from offering further rate cuts," it added.

Gopika Gopakumar in Mumbai contributed to the story.

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