- India’s monetary policy committee (MPC) has reinforced its 4% retail inflation target, with the focus shifting from bringing inflation within the tolerance band to bringing it down to the target level.
- The decision to focus on the 4% inflation target doesn’t necessarily mean that interest rates will remain higher for an extended period. Policy decisions will continue to be data-dependent.
- The goal is to have a real interest rate of around 1%, which would help sustainably reduce inflation to the target.
- The MPC’s patience in moving inflation towards the target is influenced by concerns about the fragility of economic growth.
- Household savings in India have declined significantly, reaching a 50-year low of 5.1% of GDP. Policymakers are concerned about the willingness of households to take on debt and the need for robust economic growth to ensure that this debt can be repaid from rising incomes.