Rajan says CPI target band could tighten in 5-10 years
Reserve Bank Governor Raghuram Rajan has said the target band for retail inflation could tighten much further in the future as the central bank becomes more comfortable with it.
"Going forward, we will seek to bring inflation to the mid-point of the band of 4+/2 per cent provided for in the monetary policy framework agreement, i.e., to 4 per cent by the end of a two-year period starting FY17," Rajan said on Wednesday after he surprised the markets with a 25 bps policy rate cut citing supporting data prints.
Answering a question from an analyst, Rajan had explained further, "Given that this is a process (the recently signed monetary policy framework agreement between the Reserve Bank and the government) that is just starting, we have somewhat wide bands around it.
Explaining the view further, he said, "The way we think about this 4 per cent mid-point is that if we really look at the industrial countries they are seeking, for the most part, a 2 per cent nominal interest rates and if we say on top of that we have a 2 per cent productivity advantages as we catch up in growth then a 4 per cent inflation rate on our side will tend to keep our nominal exchange rate at pretty much a level vis-avis industrial countries.
Under the monetary policy framework pact signed by the RBI and the government on February 20 to set up a monetary policy committee that will give an inflation targeting to the RBI, the central bank has to keep the retail inflation in a 2-6% band starting from April 2016, which means that CPI inflation target stands at 4%.
The RBI has glide path of 6% for 2015 and 5% for January 2016. Inflation for January stood at 5.11 per cent and analysts are expecting it to hover around 5.5 per cent in February. When probed how much support the RBI needs from the government to achieve this target, Rajan said that comfort should be taken from the government's willingness to move to an inflation targeting model.