India's inflation targeting framework must be re-examined, government report says

NEW DELHI (Reuters) - India's monetary policy framework should consider targeting inflation that excludes food, the prices of which are influenced more by supply than demand, the government's 2023/24 economic survey said on Monday.

India's central bank targets consumer price index-based inflation and is currently mandated to keep inflation at 4% with a tolerance band of 2 percentage points on either side. Volatile food and vegetable prices have caused frequent inflation spikes in recent years.

"Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth. Deploying them to deal with inflation caused by supply constraints may be counterproductive," the government report said.

"Therefore, it is worth exploring whether India's inflation targeting framework should target the inflation rate excluding food," the report said.

Annual retail inflation rate rose to 5.08% in June due to a sharp rise in food prices but demand-driven core inflation, which leaves out food and fuel prices, was around 3%.

The central bank, focussed on lowering inflation to target, has held rates for eight straight meetings.

Hardships caused by higher food prices for poor and low-income consumers can be handled through direct benefit transfers or coupons for specified purchases valid for appropriate durations, the government report said.

The suggestions were made as a part of a strategy to remove growth impediments in the agricultural sector.

(Reporting by Swati Bhat; Editing by Mrigank Dhaniwala)

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