India's implementation of CPI target to aid inflation fight: Moody's

August 7, 2016 3:40 AM EDT

An employee collects wheat from a sack inside a grocery store at a residential area in Mumbai, India, March 14, 2016. India's annual consumer price inflation eased to 5.18 percent in February from a year ago, helped by a fall in food prices, after edging

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NEW DELHI (Reuters) - India's decision to formally implement its central inflation target of 4 percent can help moderate future price rises and support macroeconomic stability, Moody's Investors Service said on Sunday.

The government this week notified parliament that it would introduce the target of 4 percent, plus or minus 2 percent, a key confirmation of the inflation-fighting policies championed by outgoing Reserve Bank of India (RBI) Governor Raghuram Rajan.

Moody's said an explicit target could help anchor price expectations and keep actual inflation at moderate levels. The government's implementation was "credit positive" and underlined its commitment to controlling price rises, the ratings agency said.

"Sustained moderate inflation would contribute to macroeconomic stability and help prevent a repetition of the short marked cycles of the past," Marie Diron, Senior Vice President, Sovereign Risk Group, said in a statement.

The 4 percent inflation target for Asia's third-largest economy, which has a history of volatile prices, is in line with the goal the government originally agreed with Rajan.

India's inflation rate has halved in the last three years, in part thanks to policies Rajan has overseen during his time as RBI governor.

His June decision to step down stunned financial markets that applauded his policies, but the ex-International Monetary Fund chief economist has sought to cement his legacy by completing the shift to formal inflation targeting before he leaves on Sept. 4.

"The changes to the monetary policy regime of the last two years mark a step toward greater policy transparency and predictability, both of which should help in policy transmission and hence monetary policy effectiveness," Moody's Diron said.

Some senior economists, including Rajan's predecessor at the RBI, have urged India not to fixate on an inflation target given the need to ensure growth and financial stability.

(Reporting by Tommy Wilkes; Editing by Sam Holmes)

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