RBI’s Policy Impact on Inflation | Delhi News – Times of India

NEW DELHI: The inflation targeting mandate to RBI has helped reduce inflation and made it less volatile, making monetary policy more effective, a new paper by two economists has said.
The paper by Barry Eichengreen, a professor at UC Berkley and NCAER director general Poonam Gupta has suggested that govt should not change RBI’s mandate or tinker with the inflation tolerance band of 2-6%, arguing it would be “risky and counterproductive”.
In recent weeks, especially since the release of the Economic Survey last month, there has been debate over targeting core inflation, excluding food. The paper, however, argued against it. “Our results indicate that food-price inflation feeds through to core inflation as producers mark up the prices of other products. Food-price inflation, which is captured by headline inflation, has predictive content for future core inflation, in other words, and should not be disregarded. Whereas central banks in advanced economies have been able to look through fluctuations in food and fuel price inflation, without consequences for core inflation and therefore without jeopardising their inflation targets, in India, where food is a much more important component of consumption baskets, this may not be the case.”

Instead, it called for an urgent reworking of the weight assigned to food and beverages in the basket of goods that make up the consumer price index (CPI). Arguing that the per capita income has doubled since 2011-12, when the 45.8% weight was assigned, the paper suggested that a 40% weight should now be assigned now, which is likely to decline to 30% in a decade based on the per capita income projections.
While RBI has a 4% inflation target as against 4.5% in Brazil, 3% in Indonesia and 1.5% in Thailand, the economists said, India has lower income and a faster-growing catch up economy and the current goal is appropriate.
They also concluded that keeping inflation within a narrower band, than the current 2-6%, will require more frequent changes in policy rates. “Such variations might create a less predictable climate for investment and hence challenges for economic growth,” it said adding that the world was entering a period of heightened volatility.