MUMBAI- India’s monetary policy committee’s (MPC) decision to reinforce the 4 percent retail inflation target follows inflation returning to its 2 percent -6 percent comfort zone, but does not necessarily signal rates will remain higher for longer, two external members of the committee told Reuters.
India’s inflation breached the rate-setting panel’s 6 percent upper tolerance limit in five of the last 12 months, but stayed between 4 percent and 6 percent in the other seven, including easing to 5 percent in September after two months of food cost-driven spikes.
“A few quarters back, the urgent task before the MPC was to bring inflation inside the tolerance band. That phase is now behind us apart from a few transient spikes above the band,” panel member Jayanth Varma told Reuters by email late on Friday.
“The focus, therefore, naturally shifts to the next stage of bringing the inflation to the target level,” said Varma, adding that there is no ambiguity in the eventual inflation goal of 4 percent .
The six-member rate-setting panel, which includes three external members, kept interest rates unchanged this month but signaled it would focus on a 4 percent inflation target, raising expectations rates could stay elevated for a while in Asia’s third-largest economy.
However, that focus does not necessarily suggest that rates will stay higher for longer as decisions will be data-dependent, panel member Ashima Goyal told Reuters via email.
“So far, despite repeated supply shocks core inflation is softening towards 4 percent .”
Varma said a real interest rate — derived by adjusting the policy rate for inflation — of around 1 percent will drive inflation sustainably down to the target.
“As projected inflation declines, the nominal repo rate consistent with the 1 percent real rate will also decline,” said Varma.
