The survey has called for “re-examining” of the existing inflation-targeting framework adopted by the central bank, pitching for the exclusion of food items, prices of which are often driven by supply constraints rather than demand shocks.The Reserve Bank has been targeting headline inflation based on the consumer price index (CPI), in which food items have over 40% weight. It’s mandated to keep retail inflation at 4%, with a tolerance band of 2 percentage points, which shapes its monetary policies, especially interest rates.
“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 survey said.
Food items have been a key driver of retail inflation in India in most part of last two years, even as core inflation has been trending down. Retail inflation in June hit 5.08%, while food inflation touched 9.36%.
The survey said when central banks in developing countries target headline inflation, they effectively target food prices, given their high weight. So, any spike in food prices threatens the inflation target, prompting the central bank to appeal to the government to bring down food rates.