MPC inflation target band retained at 2%-6% for next 5 years: DEA Secretary

Govt mandates RBI for maintaining retail inflation target at 4% (plus or minus 2%) till March 31, 2026, said Tarun Bajaj

Maintaining status quo on inflation targetting, the government on Wednesday extended 4 per cent retail inflation target for the Reserve Bank of India for the next five years.

Under the current mechanism, the RBI has been mandated by the government to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side.

"The inflation target for the period April 1, 2021 to March 31, 2026 under the Reserve Bank of India Act 1934 has been kept at the same level as was for previous five years," Economic Affairs Secretary Tarun Bajaj said.

To keep inflation under the specified level, the government in 2016 decided to set up the Monetary Policy Committee headed by RBI Governor entrusted with the task of fixing the benchmark policy rate (repo rate).

The six-member MPC, which had its first meeting in October 2016, was given the mandate to maintain annual inflation at 4 per cent until March 31, 2021 with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.

The government will borrow Rs 7.24 lakh crore in the first half of 2021-22 fiscal to meet resources to perk up the economy hit by coronavirus pandemic.

According to the Budget for 2021-22, the government's gross borrowing was estimated at Rs 12.05 lakh crore in the financial year beginning April 1.

"In the Budget, we had announced that there would be a gross borrowing of Rs 12.05 lakh crore and net borrowing of Rs 9.37 lakh crore. In the first half of 2021-22, we would be borrowing Rs 7.24 lakh crore, which is 60.06 per cent of the gross issuances," Bajaj said.

Volatile food costs and a sustained rise in global oil led consumer prices to exceed the upper band several times last year, threatening to limit the central bank’s ability to keep monetary policy loose to help stimulate the economic recovery. The situation also posed political risks for Prime Minister Narendra Modi’s government in the run up to key state elections.

The yield on the benchmark 10-year bond has climbed about 30 basis points since early February amid growing wagers the central bank may reverse the course of its accommodative policy to curb any surge in inflation.

The current five-year mandate for flexible inflation targeting, known as FIT, requires the RBI to keep headline inflation at the 4% midpoint of its range. The 400 basis points within which the central bank has sanction to operate is the widest in Asia, and only matched by Turkey and surpassed by Argentina.

The RBI had previously faced criticism for largely overstating inflation, with its forecasts used to underpin a hawkish policy stance in 2018. Recent stubborn inflation has forced the central bank to pause interest-rate cuts despite the economy needing more stimulus after entering an unprecedented recession.