Inflation Targeting Current Affairs - 2020

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Retail Inflation at 5-year high of 7.35% in December, 2019

According to the data released by Ministry of Statistics and Programme Implementation on January 13, 2020, the food inflation increased to 14.12% in December 2019 as compared to 10.01% in November 2019. The CPI (consumer Price Index) rose to 7.35% as compared to 5.54% the previous month. The inflation was increase was mainly due to vegetables

Highlights

In December 2018, the food inflation was -2.65%. Vegetable inflation in urban areas touched 75% and at the country sides it was at 53%. Onion inflation doubled as compared to the previous month. It was 128% in November and it increased to 328% in December.

Analysis

The soaring crude oil prices due to the increasing tensions between Iran and US is the major reason. In the coming Budget, GoI is expected to increase its spending largely on infrastructure and cut taxes. This might stoke inflation further.

RBI

For the first time, the inflation has breached RBI’s target inflation of 4% (±2%). Predicting the situation, RBI had kept its policy interest rates on hold in its policy review of December 2019.

Implications

As inflation increases, the following can be expected

  • Increase in interest rates that will increase cost of borrowing
  • Slow-down in investment and economic growth

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Union Government fixes an inflation target of 4 percent for five years

The Union Government has set an inflation target of four per cent for the next five years i.e. till March 31, 2021.

In this regard, Union Government will soon set-up Monetary Policy Committee (MPC) to adhere to the target till March 31, 2021.

Backgroud

  • This target was fixed after the Union Government and Reserve Bank of India (RBI) had reached an agreement on a monetary policy framework.
  • The framework had had set the inflation target at four per cent, plus or minus two per cent. However, there was no legal backing to it.
  • The Union Government in June 2016 also had notified rules for setting up the MPC giving effect to amendments in the RBI Act.

What is Inflation targeting?

  • Inflation targeting is a monetary policy in which a central bank estimates and makes public a projected or “target” inflation rate.
  • After declaration of target, the central bank attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools.
  • The key advantage of a target is that it allows to recognise the short run trade-offs between inflation and growth.
  • It also enables Central Bank to pursue the inflation target in the long run over the course of a business cycle.

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