RBI Could Face Challenges After it Set 2-6% Inflation Target for Next Five Years

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RBI Could Face Challenges After it Set 2-6% Inflation Target for Next Five Years

By Aditya Raghunath

Investing.com -- The Indian government has asked the RBI (Reserve Bank of India) to maintain retail inflation at 4% with a margin of 2 percentage points on either side until March 2026. Economic Affairs Secretary Tarun Bajaj said, “The inflation target for the period April 1, 2021, to March 31, 2026, under the Reserve Bank of India Act 1934 has been kept at the same level as was for the previous 5 years.”

This continuity is important while framing economic policies for the next five years. The government has been keen to ensure inflation doesn’t cross 4% so that the monetary policy framework will not be disturbed.

In December in a paper authored by Michael D. Patra, RBI Deputy Governor, and Harendra Kumar Behera, the authors wrote, “Central to the design and conduct of monetary policy is the concept of trend inflation, the level to which actual inflation outcomes are expected to converge after short-run fluctuations from a variety of sources die out.”

RBI will have its task cut out. Retail inflation had hit 5.03% in February 2021, a three-month high thanks to increasing fuel prices. Commodity prices are also going up. Automakers like Maruti Suzuki India Ltd. (NS: MRTI ) have already said that they will be passing on hikes to consumers. It’s the same call that AC companies have made. FMCG companies have also increased prices.

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