The Centre’s targeting of inflation at four percent with a range of plus/minus two per cent is a "credit positive" step hat will help macroeconomic stability, Moody's Investors Service has said.
In a statement, Moody's Senior Vice President (Sovereign Risk Group) Marie Diron said, “The Indian government's notification of the inflation target at four per cent, plus or minus two per cent through to 2021 is a credit positive re-affirmation of commitment to keeping inflation at moderate levels”.
"Sustained moderate inflation would contribute to macroeconomic stability and help prevent a repetition of the short marked cycles of the past," he added.
Inflation target until March 31, 2021, was notified by Centre on Friday in consultation with the Reserve Bank of India (RBI).
The Centre said that inflation target will be considered as a failure if the average inflation is more than the upper limit of six per cent or below the lower level of two per cent for three consecutive quarters.
If the central bank is unable to meet the inflation target, it will need to state reasons for failure to the Centre in a report along with the remedial measures proposed to be taken and an approximation of the time-period within which the inflation target shall be achieved, according to the Finance Bill 2016.
The changes to the monetary policy regime of last two years mark a step towards greater policy predictability and transparency, both of which should help in policy transmission and hence monetary policy effectiveness, Diron said.
The setting of the inflation target comes under the monetary policy framework pact between the government and the RBI signed in early 2015.
Centre in consultation with RBI will hereafter determine the inflation target in terms of the Consumer Price Index (CPI) inflation or retail inflation, once in five years.