Inflation target is aggressive, feel economists

The RBI’s decision to target an inflation rate of 4-4.5% in the medium-term came as a surprise. While most economists supported the finance minister’s view that the target is an aggressive one, they feel the announcement is aimed at reining in inflationary expectations in the coming months. Inflation and inflationary expectations are the major factors considered while framing the current monetary policy, according to Yes Bank chief economist Shubhada Rao.

The inflation was at 6.04% for the week ended April 7 much above the set trajectory of 5-5.5% for 2006-07. Since the central bank is awaiting the full impact of earlier policy measures, no new steps have been announced. The inflation target for FY08 has been reduced to 5%, with RBI’s focus clearly on inflation management.

“In recognition of India’s evolving integration with the global economy and societal preferences in this regard, the resolve, going forward, would be to condition policy and perceptions for inflation in the range of 4.0-4.5%. This objective would be conducive for maintaining self-accelerating growth over the medium-term,” the policy says. Though no timeframe has been mentioned to reach this level, a 2-4 year period can be assumed.

Considering the current level of inflation, attaining such a low level is definitely an aggressive target, says Crisil’s senior economist DK Joshi. Further tightening of monetary policy could not be ruled out, says Ms Rao, but the data on headline inflation, non-food credit and capital flows in coming weeks will determine the further direction of monetary policy.

Economic advisor of Ficci Anjan Roy says the inflation target will ensure a comfort zone but whether these targets can be attained remains to be seen.

Apart from policy decisions, growth in agriculture output is an important factor to be considered for attaining the target, as prices of primary articles are a major driving factor for hardening inflation during 2006-07.

Global factors like firming up of commodity prices, especially agri-commodities, and volatility in crude oil prices are already factored in while setting these targets. So, with an appropriate policy mix to address underlying inflationary pressure and inflationary expectation, inflation could be targeted at 4-4.5% for coming years.

A lower inflation level with a sustainable growth above 8% is what the RBI is aiming in the current policy. “The overall stance of monetary policy for the period ahead reinforced the emphasis on price stability and well-anchored inflation expectations so as to enable continuation of the growth momentum.”