RBI's inflation comfort zone need not be changed: Rangarajan

December 8, 2012

Prime Minister’s Economic Advisory Council (PMEAC) C. Rangarajan pined not to alter the RBI’s inflation comfort level from 4-5%.
In 1998, Rangarajan had considered inflation rate at 6% to 7% as “acceptable level”. At that time, inflation level was as high as 10% to 11%. High inflation caused problems on the exchange rate side, and it was desirable to control inflation to 4-5% which was considered as comfort zone by RBI.
RBI is not reversing its monetary policy position on the back of inflationary expectations. It has asked the Centre to take steps to slash rising fiscal deficit. The rupee has depreciated considerably against the dollar in the last one-and-a-half years. In 2011, the exchange rate was Rs 48 per dollar. Currently it has depreciated to Rs 55 per dollar. The economic growth has declined to 5.3% in the second quarter, and growth for the entire financial year has plummeted to a 10-year low. During October, consumer price index-based inflation rate in the US stood at 2.2%, against 9.75% in India.
Why some experts believe inflation comfort zone should be changed?

Some experts believe that in present conditions where fuel price has been increased, minimum support price being increased every year, and supply constraints, inflation normal cannot be four-five per cent. They think that, in a country like India, where a large part of agriculture is monsoon dependent, inflation can only be reduced in a phased manner in the medium-to long-run, from 6-7% to 5% and then to 4% since targeting 4-5% inflating in short run would be difficult.