03 JAN,2021 | MEDC
Inflation remains India’s biggest economic enemy, and targeting it precisely should not be abandoned under any conditions by the RBI. An intellectual argument has arisen to ignore inflation in Covid times as raising interest rates in response now will hurt our fledgling recovery. What this would translate to, is a tolerance of around 6% inflation, with a pushdown planned for later. A new working paper by the RBI has advocated maintaining the 4% inflation target. Changing the inflation target despite the evidence that it has worked well will affect policy credibility … this is a risk not worth taking. We need to realize that what works in the developed West’s financial architecture need not necessarily work here, and accordingly devise our own innovative strategies. The RBI and the Finance Ministry need to be on the same page as far as inflation management in the economy is concerned. While it is important for the government to preserve the Central Bank’s autonomy, it is equally important for the RBI to estimate the inflation trajectory more accurately in times of stress like the current one. It takes two to tango.
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