The Reserve Bank of India (RBI) should not be overly concerned about retail inflation target of 4 per cent as the targeting may lead to decline in output, affecting growth, SBI's chief economist said today.
"RBI should not be overly concerned about CPI inflation to be at 4 per cent. As it has a plus/minus bias of 2 per cent so if inflation moved in from 4 per cent to 6 per cent it is fine," State Bank of India (SBI) Group Chief Economic Adviser Soumya Kanti Ghosh said at an interactive session here today.
"So even if it moves to 5-5.5 per cent for some period of time it is not going to harm. It there is an inflation targeting then there is a decline in output (over the period of time)," he said.
He also cited empirical evidence suggesting that inflation targeting countries, which tend to disinflate rapidly in the initial years, tend to witness a decline in output that affects growth.
In early 2015, the RBI and the government signed a monetary policy framework targeting to tame inflation to 4 per cent with a band of plus/minus 2 per cent from 2016-17 onwards.
Ghosh said if the government and the RBI move towards the 4 per cent inflation by January 2018, as suggested earlier, it will leave limited room for rate cut in forthcoming policies.
In its fourth bi-monthly monetary policy announced a day earlier, Reserve Bank kept the key policy rate at which it lends to banks -- the repo -- unchanged at 6 per cent citing inflationary pressure going forward.
The economist also suggested that the government must go for a fiscal push.
"Policy should now focus on structural bottlenecks and not putting money in the hands of consumers. The first of these is to recapitalise PSB is through widely discussed recapitalisation bonds that has not only precedence in India but also in many other countries (Korea, Malaysia etc)," Ghosh said.
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