Budget 2021: Government to raise inflation rate up to 5%, to create room for RBI

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The government is considering a proposal to raise the consumer price index (CPI)-based inflation target under the monetary policy framework up to 5% with a tolerance level of plus and minus 2% from 1st April to give more room to the Reserve Bank of India (RBI). Thus, RBI will be able to cut policy rates in order to boost growth in the pandemic-ravaged economy.

The proposal will be announced along with other fiscal measures in the Budget for FY22 aimed at reviving growth.

India’s gross domestic product is expected to shrink 7.7% this fiscal year says the first advanced estimate by the National Statistical Office.

The government in 2016 notified 4% CPI inflation as the target for the period from 5th August 2016 till 31st March 2021 with an upper tolerance limit of 6% and the lower limit of 2%.

As per the RBI Act, 1934, the Centre, in consultation with RBI, has to finalize the inflation target for the next five years starting 1st April and also get it passed by Parliament.

As reported by Hindustan Times, the finance ministry and RBI did not respond to emailed queries. “The need to raise the limit is felt more when RBI had to pause interest rate cuts because retail inflation soared to a 77-month high in October (7.61%) and stayed above the specified range in November (at 6.9%) at a time when the economy was struggling and required more stimulus,” an anonymous source revealed.

Economy contracted by 23.9% in the June quarter, by the end of September quarter the rate fall to 7.5%.

Retail inflation fell sharply to 4.6% in December, below the upper limit of RBI’s tolerance range of 6% for the first time since March 2020, it averaged 6.6% in the first nine months of this fiscal, ruling out an immediate cut in interest rate by RBI. The RBI’s monetary policy committee is expected to meet next month.