At a panel discussion last month, RBI Governor Sanjay Malhotra said, “We are aware that the global situation is still fluid and its macroeconomic implications are still unfolding. We are keeping a close vigil on whether and when the supply shock can become embedded in the general price level that may warrant monetary policy action.”
When faced with supply shocks and uncertainty, according to him, it is important that the policy frameworks focused on price stability are flexible enough to allow central banks to look through transitory shocks while remaining agile and nimble. It is necessary to maintain a broad policy stance by avoiding firm commitments on the future path of policy. “In such circumstances, the broad approach is to be even more data-dependent and to continuously reassess the balance of risks. Whether to look through or not depends on the duration of inflation and whether it is generalised in the economy,” he stressed.
In his view, inflation targeting has helped navigating through the persisting shocks and provided flexibility to respond to evolving circumstances. The average inflation has indeed reduced by about 2 percentage points after the targeting was introduced. “The sufficiently wide tolerance band of (+)/ (-) 200 basis points around the inflation target of 4 per cent provides the necessary policy space to accommodate supply shock-induced volatility in the short run while maintaining focus on the medium-term objective of price stability,” Malhotra said.
