Price-Level Targeting Would Mean More Rate Cuts in India

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A temporary breach of the 4% inflation target from October is likely to put pressure on the Reserve Bank of India to abandon its accommodative stance, but that would be a mistake, according to Bloomberg Economics. BE applies an alternative approach to managing inflation: targeting the consumer price index based on the 4% mid-point inflation target. BE’s analysis applying this method indicates the existing negative inflation gap is only expected to widen ahead, so a halt in monetary easing now could create a negative feedback loop similar to the RBI’s 2018 policy mistake of prematurely raising rates and hurting growth.