The inflation target is likely to be retained at 4% in the medium term, a Reserve Bank of India working paper suggested on Monday. The paper, authored by Harendra Kumar Behera and Michael Debabrata Patra, says: If it ain’t broke, don’t fix it.Patra, a deputy governor at the central bank, is also part of the monetary policy committee (MPC) tasked with keeping inflation within the flexible target of 2-6%.
Results from a regime switching model applied to a hybrid New Keynesian Philips Curve (NKPC) suggest a steady decline in trend inflation since 2014 to 4.1-4.3% just before covid pandemic. This points to maintaining the inflation target at 4% for India, the paper said. NKPC is a widely used model of inflation dynamics, according to a European Central Bank’s working paper from 2007.
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