RBI at fork in road, experts back chasing headline inflation target

Food squeeze Inflation targeting countries with the highest share of food in consumer price index (CPI).

- Shayan Ghosh

India's central bank is facing a crucial question: Should it continue to target headline inflation, even when volatile food prices are largely beyond its control? The answer, according to a consensus of economists and experts, is a resounding yes.

A day after the Reserve Bank of India (RBI) reignited the debate over its inflation-targeting framework, a wide array of analysts argued that anchoring monetary policy to headline inflation remains the most effective approach for the country.

The primary argument for maintaining the status quo is the simple reality of the Indian consumer. Food accounts for a staggering 46% of India's consumer price index (CPI) basket, the highest weighting among 46 nations that use inflation targeting. For the average Indian household, especially in lower-income brackets, food costs are a disproportionately large portion of their budget.

"You cannot create an easy financial environment when one side of your consumption basket is seeing upward pressure," said Gaura Sengupta, chief economist at IDFC First Bank. Sengupta believes it makes sense to target headline inflation, and from the RBI paper, it looks like it will be retained as the anchor.

In a discussion paper on Thursday, the RBI said headline inflation is preferred globally as a more representative measure of overall price conditions. In fact, except for Uganda, all nations that target inflation track headline inflation to set monetary policy.