India’s government has signed a deal with the central bank to set formal inflation targets for the first time, seeking to end damaging price volatility in the nation of 1.2 billion people.
Rising food prices cause huge hardships for India’s millions of impoverished citizens and Reserve Bank of India Governor Raghuram Rajan has made controlling inflation a priority since taking the role, resisting calls to reduce interest rates.
The agreement, signed on Feb. 20 and released late on Monday, sets the central bank a target of bringing inflation consistently below 6 percent by January next year, and to 4 percent for the financial year from next year to 2017.
If it fails to meet the targets, the bank must set out the reasons in a report to the government that also details the remedial action it plans to take.
The bank previously had a general mandate to ensure price stability, but no formal inflation targets.
Economists welcomed the move, which they said would also place the onus on the government to avoid overspending and adding to inflationary pressures.
“The adoption of the new framework also increases the responsibility of the government to maintain fiscal prudence, as fiscal slippage — especially on account of higher unproductive spending — would be inflationary,” YES Bank economists said in a report.
Indian Minister of Finance Arun Jaitley said in Saturday’s budget that the government would achieve its goal of cutting the fiscal deficit to 4.1 percent of GDP for last year to this year, but would delay by a year the goal of cutting it to 3 percent.
The central bank cut interest rates by 25 basis points to 7.75 percent in January, the first reduction in 20 months, after inflation eased, helped by lower fuel prices.
India’s consumer inflation rose to 5.11 percent year-on-year in January, up slightly from 5 percent in December last year, while wholesale prices eased 0.39 percent.
However, Rajan has said that future rate cuts would depend on prudent government action, including “sustained high quality fiscal consolidation,” as well as continuing falling prices.
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