Headline inflation has significant impacts on Indians and, according to external members of the central bank’s rate panel, should remain the target for monetary policy instead of switching to core inflation. The suggestion to target inflation excluding volatile food prices has sparked a debate in India regarding the appropriate target for monetary policy. India adopted the inflation targeting framework in 2016, with a 4% headline inflation target for the central bank’s rate-setting panel. This has limited interest rate cuts as rising food prices have kept headline inflation above 4%, despite core inflation falling to around 3%.
Shashanka Bhide, an external member of the Reserve Bank of India’s MPC, emphasized the need to consider the entire consumption basket to accurately assess price pressures in the economy. The MPC, consisting of RBI officials and external members, has maintained the key repo rate at 6.5% for nine consecutive meetings due to persistently high food prices. India’s economic growth is expected to slow to 7.2% in the current fiscal year from 8.2% the previous year.
Jayanth Varma, another external MPC member, supports rate cuts but believes the target should not be switched as it is mandated by the government. High food inflation has made it challenging to reach the target, and concerns remain over whether high food inflation would spill over into core inflation if the target were changed to core. Research has shown that the headline inflation rate trends towards core inflation in India over the long term, although headline inflation impacts the public more directly.
Ashima Goyal, the third external member of the MPC, believes the panel should pay more attention to core inflation despite its impact on the public. The current rate panel has faced challenges with headline inflation being above the 4% target due to high food and fuel prices. Goyal suggests that targeting core inflation could provide room for lowering interest rates, but Varma disagrees, noting that the numerical value of the core inflation target could vary, making it uncertain where the repo rate would stand. In conclusion, the debate continues over whether to focus on headline or core inflation as the target for India’s monetary policy.
