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India’s monetary policy committee (MPC) decision to reinforce the 4 per cent retail inflation target follows inflation returning to its 2pc-6pc comfort zone, but does not necessarily signal rates will remain higher for longer, two external members of the committee told Reuters.
India’s inflation breached the rate-setting panel’s 6pc upper tolerance limit in five of the last 12 months, but stayed between 4pc and 6pc in the other seven, including easing to 5pc in September after two months of food cost-driven spikes.
“A few quarters back, the urgent task before the MPC was to bring inflation inside the tolerance band. That phase is now behind us apart from a few transient spikes above the band,” panel member Jayanth Varma told Reuters by email late on Friday.
“The focus, therefore, naturally shifts to the next stage of bringing the inflation to the target level,” said Varma, adding that there is no ambiguity in the eventual inflation goal of 4pc.
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The six-member rate-setting panel, which includes three external members, kept interest rates unchanged this month but signalled it would focus on a 4pc inflation target, raising expectations rates could stay elevated for a while in Asia’s third-largest economy.
However, that focus does not necessarily suggest that rates will stay higher for longer as decisions will be data-dependent, panel member Ashima Goyal told Reuters via email.
“So far, despite repeated supply shocks core inflation is softening towards 4pc.”
Varma said a real interest rate – derived by adjusting the policy rate for inflation – of around 1pc will drive inflation sustainably down to the target.
“As projected inflation declines, the nominal repo rate consistent with the 1pc real rate will also decline,” said Varma.
“Everything therefore depends on how the projection for inflation 3-4 quarters ahead evolves in the coming quarters.”
The MPC’s “patience in gliding inflation” towards the target “is driven primarily by concerns about growth fragility,” Varma said.