Goldman Sachs for formal inflation target by government

A Goldman Sachs report on Thursday suggested setting a formal “inflation target” by the government for anchoring inflation expectation.

“We believe a formal inflation target for monetary policy has the great advantage of focusing attention on the objective that monetary policy can achieve in the long run, namely price stability," the report said. A formal inflation target means the government setting a specific target for the central bank for inflation which has a legislative mandate. Countries like New Zealand follow this kind of price index target.

The Reserve Bank (RBI) in its annual monetary policy predicts an annual inflation number every year which is not a mandate, as there is no inflation target set by the government. Due to wild variations in the different set of industry data, the RBI has been revising this target many times in the past. For instance this year, the target has been revised upwards twice from 6.5 per cent from 7.5 per cent. Similar were the experiences of the past two fiscal years, too.

Talking about the rationale behind such approach, the report said it would help a nominal anchor for monetary policy and inflation with increased accountability.

"It would allow the RBI to focus on the key variable that is its mandate to influence and withstand external pressures and influence, especially from the government, on changing its goals," it added.

RBI, which is slated to announce the second quarter monetary policy on October 30 in the backdrop of renewed spurt in inflation, has been fighting a not-so-successful battle against inflation since October 2010 and had been keeping interest rates very high to rein in the demand.