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Inflation Targeting

Inflation Targeting in India Highlights

  • It is below the 7% mark for the first time in three months and only the second time since April’s eight-year high mark of 7.8%.
    • Wholesale price inflation has dropped to 8.3% in October.
  • Favourable Outlook: In the last monetary policy committee (MPC) meeting, the RBI had projected inflation at 6.5 per cent during October-December.
    • Thereafter, it expects inflation to dip to 5.8 per cent in the fourth quarter (January-March) and then further to 5.0 per cent in the first quarter (April-June) of the next financial year (2023-24).
Inflation-Targeting-UPSC
Inflation-Targeting-UPSC

Factors Contributing to Lower Inflation Targeting

  • Favourable base effect: It cancelled out a 0.8 percent month-on-month increase in the general index of the CPI. In October 2021, the inflation had surged 1.4 percent on a month-on-month basis.
  • Easing food prices: Food price inflation cooled to 7 percent from September’s 22-month high of 8.6 percent.
    • Food and beverages constitute 46 percent of the CPI basket.
    • It is driven significantly by “the decline in prices of vegetables, fruits, pulses and oils & fats”.
  • Rural-Urban Inflation: CPI inflation in October recorded a sharper moderation in urban areas — down from 7.3 per cent to 6.5 percent — compared to rural areas, where inflation eased to 7.0 percent from 7.6 percent.
    • Core inflation (inflation minus the volatile food and fuel items) reduces slightly to 6 percent in October from 6.1 percent in September.

 

Inflation Targeting Concerns

  • This is the tenth month in a row that inflation has been over the 6% upper tolerance threshold mandated for the Reserve Bank of India (RBI).
    • RBI is mandated to keep inflation at 4 per cent (plus/minus 2 per cent).
  • Cloudy Inflation Outlook: Supply-chain disruptions due to ongoing geopolitical factors and hardening of commodity prices globally continue to thrust ahead the inflationary pressure.
  • Even though the headline inflation number has come down, price pressures continue to remain in the economy.
  • Despite inflation falling significantly in October, it is unlikely to influence the RBI’s near-term interest rate decisions.
    • Since early May, the RBI has undertaken aggressive policy tightening to bring inflation down and increased the policy repo rate four times, including by 50 basis points in the September meeting.

 

Wholesale Price Index

  • It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
  • Published by the Office of Economic Adviser, Ministry of Commerce and Industry.

 

Consumer Price Index

  • It measures price changes from the perspective of a retail buyer. It is released by the National Statistical Office (NSO).
  • The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.

 

Headline Inflation

  • It is calculated using the Consumer Price Index. This index had different categories with varying weights. There are three main categories:
    • Food Items, which account for 46% of the index;
    • Fuel and Light, with a weight of 7%;
    • Core, all other items, which make up the remaining 47%.

 

Monetary Policy Committee

  • The Monetary Policy Committee (MPC) is constituted by the Central Government under Section 45ZB of RBI Act to determine the benchmark interest rate in India.
  • The MPC is chaired by the RBI governor.
  • The MPC determines the policy repo rate needed to achieve the inflation target.
  • The MPC is needed to meet at least four times in a year. The quorum required for the meeting of the MPC is four members.
  • Each MPC member has one vote, and in the event of an equality of votes, the Governor has a casting vote.

 

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