The government on Friday notified 4 per cent inflation target with a range of plus/minus 2 per cent for the next five years under the monetary policy framework agreement with the Reserve Bank. The move is positive for the rupee and the debt market and overall economy, say analysts.
"The first beneficiary will the currency (rupee). When you keep inflation low, the pressure on currency depreciation evaporates," said Sajjid Chinoy, chief India economist at JP Morgan. (Watch)
India being a developing economy with higher inflation as compared to the developed world, depreciation of the currency is quite natural. For example, the rupee was at around 45 levels against the dollar in 2005.
But when domestic inflation reaches very high levels, it impacts the stability of the economy. The currency gets weakened, increasing import costs and thus the current account deficit. The rupee hit had slumped to a record low of 68.85 in August 2013 amid high current account deficit and high inflation.
Mr Chinoy said the move to target inflation at 4 per cent sends "huge signals to the global community. We had a period of six years when consumer inflation was running close to double digits and this led to all sort of problems for the economy."
Experts also say that a stable rupee will help reduce the volatility in the stock market and help attract more inflows into bond market.
"This is a positive directional move for the debt markets. This will reinforce the rally in the debt markets especially with the expectations of food prices coming under control with good monsoon," said Manoj Nagpal, CEO of Outlook Asia Capital.
Strong overseas inflows and easing concerns over food prices have sparked a rally domestic bond markets with yield on 10-year benchmark bonds falling to multi-year lows of 7.17 per cent.
"Benchmark yields will according adjust themselves downwards, given the strong commitment the government has shown on inflation management. We expect debt market yields and overall interest rates to move down significantly in the next two years by at least 150 basis points," Mr Nagpal said.
"The first beneficiary will the currency (rupee). When you keep inflation low, the pressure on currency depreciation evaporates," said Sajjid Chinoy, chief India economist at JP Morgan. (Watch)
India being a developing economy with higher inflation as compared to the developed world, depreciation of the currency is quite natural. For example, the rupee was at around 45 levels against the dollar in 2005.
But when domestic inflation reaches very high levels, it impacts the stability of the economy. The currency gets weakened, increasing import costs and thus the current account deficit. The rupee hit had slumped to a record low of 68.85 in August 2013 amid high current account deficit and high inflation.
Mr Chinoy said the move to target inflation at 4 per cent sends "huge signals to the global community. We had a period of six years when consumer inflation was running close to double digits and this led to all sort of problems for the economy."
Experts also say that a stable rupee will help reduce the volatility in the stock market and help attract more inflows into bond market.
"This is a positive directional move for the debt markets. This will reinforce the rally in the debt markets especially with the expectations of food prices coming under control with good monsoon," said Manoj Nagpal, CEO of Outlook Asia Capital.
Strong overseas inflows and easing concerns over food prices have sparked a rally domestic bond markets with yield on 10-year benchmark bonds falling to multi-year lows of 7.17 per cent.
"Benchmark yields will according adjust themselves downwards, given the strong commitment the government has shown on inflation management. We expect debt market yields and overall interest rates to move down significantly in the next two years by at least 150 basis points," Mr Nagpal said.
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