India’s CPI Target Implementation to Support Inflation Combat: Moody’s Report by Reuters

NEW DELHI – India’s formal adoption of a central inflation target of 4 percent is expected to help moderate future price increases and bolster macroeconomic stability, according to Moody’s Investors Service.

This week, the government informed parliament of its intent to introduce a 4 percent inflation target, with a permissible variation of plus or minus 2 percent. This move reinforces the inflation control policies advocated by outgoing Reserve Bank of India (RBI) Governor Raghuram Rajan.

Moody’s emphasized that having an explicit target could help stabilize price expectations and maintain actual inflation at moderate levels. The agency described the government’s decision as "credit positive," highlighting its commitment to managing price increases.

Sustained low inflation is likely to enhance macroeconomic stability and prevent the recurrence of the economic volatility seen in previous years, noted Marie Diron, Senior Vice President of the Sovereign Risk Group.

The 4 percent inflation target is a continuation of the objective originally established with Rajan, as India seeks to combat its history of price fluctuations. Over the past three years, the country’s inflation rate has halved, partly due to the policies implemented during Rajan’s tenure.

His unexpected resignation in June surprised financial markets, which had largely supported his strategies. However, Rajan aimed to solidify his legacy by ensuring the transition to formal inflation targeting was completed before his departure on September 4.

Diron commented on the changes to the monetary policy framework over the past two years, noting that they represent progress toward greater transparency and predictability in policy, which should enhance the effectiveness of monetary policy.

Despite this, some senior economists, including Rajan’s predecessor at the RBI, have cautioned against a singular focus on an inflation target, emphasizing the importance of fostering economic growth and maintaining financial stability.