India Keeps Rajan’s Inflation Target as His Term Nears End

  • Inflation surged 5.8% in June, fastest pace in 22 months
  • Rajan urged successor to continue war on price pressures

Raghuram Rajan.

Photographer: Dhiraj Singh/Bloomberg

India cemented Governor Raghuram Rajan’s inflation target, assuring investors it would continue the battle against one of Asia’s strongest price pressures even after he leaves the central bank.

The Reserve Bank of India will aim to keep consumer price inflation at four percent through 2021, while allowing the rate to fluctuate in a 2 percent to 6 percent band, the government told lawmakers in a statement on Friday.

The wide range allows the monetary policy committee to recognize "short run trade-offs between inflation and growth but enables it to pursue the inflation target in the long run," the document read. It also accommodates distortions such as data limitations, projection errors and short-term shocks while nudging inflationary expectations toward the center, it said.

The formalization of the target first introduced last year reduces the risk that future policy makers will abandon the biggest overhaul in the 81-year-old Reserve Bank of India’s functioning. Rajan, who holds his last policy review on Tuesday, has urged his yet-to-be-named successor to continue the fight against inflation.

"It is important from a macroeconomic stability point as it adopts a path of continuity," said Shubhada Rao, an economist with Yes Bank Ltd. in Mumbai. "This reiterates the eagerness to adhere to the path of inflation management."

India is currently setting up a new rate-setting panel that will implement the inflation target. Rajan announced he would return to academia after a key ally of Prime Minister Narendra Modi accused him of stifling growth by keeping rates too high.

Consumer prices rose 5.77 percent in June, the fastest pace in 22 months. Economists say a new national sales tax could boost inflation in the year of implementation.

To read about the risks to India’s inflation, click here

India’s benchmark equity index was trading 0.9 percent higher at 1:25 p.m. in Mumbai. The currency gained 0.3 percent to 66.75 per dollar, and the yield on the 10-year sovereign bond fell to 7.16 percent from 7.17 percent.

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