India likely to retain RBI's inflation target

Indian government is likely to leave the inflation targeting band for its central bank unchanged, according to people familiar with the matter, while policy makers remain focused on rising prices amid the rebound from the pandemic.

A consumer-price inflation band tracked by the Reserve Bank of India (RBI) is likely to be retained at the current 2 per cent - 6 per cent range, said the people, who asked not to be identified citing rules before the framework is finalised by March 31. The government is mulling small changes to the system, including safeguard options that offer leeway in cases of exceptional events, they said, without providing further details. Inflation averaged around 3.9 per cent since a mechanism was introduced.

A spokesperson for the Finance Ministry declined to comment, while the RBI didn't immediately respond to an emailed request for comment. Volatile food costs and a sustained rise in global oil led consumer prices to exceed the upper band several times last year, threatening to limit the central bank's ability to keep monetary policy loose to help stimulate the economic recovery. The situation also posed political risks for Prime Minister Narendra Modi's government in the run up to key State elections.

The yield on the benchmark 10-year bond has climbed about 30 basis points since early February amid growing wagers; the central bank may reverse the course of its accommodative policy to curb any surge in inflation. The current five-year mandate for flexible inflation targeting, known as FIT, requires the RBI to keep headline inflation at the 4 per cent midpoint of its range. The 400 basis points within which the central bank has sanction to operate are the widest in Asia, and only matched by Turkey and surpassed by Argentina.

The RBI last month said the existing regime is effective and recommended that the band be retained. It suggested some aspects of the framework be reviewed. (Bloomberg)