Threshold level for inflation is 4-6%, says RBI

The Reserve Bank of India (RBI) said on Saturday if inflation stayed beyond the threshold level of four-six per cent, it could hurt economic growth in the medium term.

“The Reserve Bank’s current assessment suggests that the threshold level of inflation for India is in the range of four-six per cent. If inflation persists beyond this level, it could lower economic growth over the medium term. These costs, therefore, necessitate monetary policy response to control inflation,” Deepak Mohanty, executive director, RBI, said in a speech at the Indian Institute of Technology, Guwahati.

With high global commodity prices likely to stay firm, the threat to price stability from global inflation continues to persist. Mohanty said the stance of the central bank was to bring down medium-term inflation to three per cent, which was consistent with the country’s integration with the global economy.

 

“In this direction, monetary policy aims to contain perceptions of inflation in the range of 4-4.5 per cent, with a particular focus on the behaviour of the non-food manufacturing component,” he said, setting aside the theory of high inflation seen as ‘new normal’.

India’s headline inflation has stayed much above RBI’s comfort zone for more than a year now, despite policy tightening measures. RBI has hiked the key policy rates by 11 times since March 2010. The central bank’s inflation management became more challenging, as supply side factors stoked food inflation.

As Mohanty pointed out, inflation remained high on account of high food prices, rising rural incomes, high global commodity prices and increase in administered fuel prices. “Inflation has remained elevated and persistent over 18 months now. The inflation path was influenced by a number of domestic and international supply shocks.”

He emphasised monetary policy recognised that over the long-run, high inflation was inimical to sustained growth, as it slowed investment by creating uncertainty which posed significant risks to future growth.

“It was indicated by the Reserve Bank that bringing down inflation, given its generalised nature, even at the cost of some growth in the short-run, should take precedence,” he added.