RBI has retained its inflation projection at 5.4% for the current year. Uncertainties in food prices and volatility in global crude oil prices continue to keep 4% target out of reach.
Geopolitical conflicts & new cold war have upended oil, various food and commodity markets. Climate-change issues will impose other costs. So, prices will rise even if demand is weak.
Findings are of relevance for RBI, which has followed inflation targeting policies since 2016 but had to write to govt in December 2022 explaining why inflation had overshot target.
According to data released Monday, retail inflation softened to a four-month low of 5.3% in August, from 5.59% in the previous month, led by subdued prices of food articles.
Many experts argued against retaining 4% plus-minus 2% target, while some wanted to scrap the framework altogether. But it provides stability, can help growth.
Year-on-year method misses trends in prices, so month-to-month seasonal adjustment should be used. According to this, May-December avg inflation was 4.05%.
RBI must work towards better transmission mechanism, for which India needs deep & liquid bond market, competitive banking sector & regulatory framework.
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