Writing for Mint, Niranjan Rajadhyaksha argues for relooking at the equilibrium real rate of interest and the inflation target by Indian monetary policy committee (MPC). Excerpts below:
"Most private sector economists predict that inflation pressures will ease in 2020. The divergence in the different measures of Indian inflation has often been a flashpoint for debate. Does core inflation move towards headline inflation or is it the other way round? The record is confusing. In the early years of this decade, high food inflation eventually became generalized. Inflation spread from food to the rest of the economy. Last year, core inflation was well above headline inflation for many months. It eventually came down to meet the headline number rather the headline number moving towards core.
The current state of the Indian economy calls for lower interest rates, despite a temporary blip in inflation. There should be two other analytical issues on the horizon—the equilibrium real rate of interest and whether a new inflation target is needed."
Read the full article here.