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India Inflation Target Band Appropriate For Next 5 Years: RBI Report

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Capital Market
Last Updated : Feb 26 2021 | 4:04 PM IST

The current numerical framework for defining price stability, i.e., an inflation target of 4 per cent with a +/-2 per cent tolerance band, is appropriate for the next five years, according to the Report on Currency and Finance (RCF) for the year 2020-21, released by the RBI. The theme of the Report is Reviewing the Monetary Policy Framework which assumes topical relevance in the context of the review of the inflation target by March 2021 against the backdrop of structural changes in the macroeconomic and financial landscape that have prompted several central banks to undertake policy framework reviews. The period of study in this report is from October 2016 to March 2020 commencing with the formal operationalisation of the flexible inflation targeting (FIT) framework in India but excluding the period of the COVID-19 pandemic in view of data distortions.

During the period under review, headline CPI inflation averaged 3.9 per cent in India with a decline in inflation volatility, attesting to the success of FIT in terms of its primary mandate. Trend inflation to which actual inflation converges after a shock provides an appropriate benchmark for the inflation target; trend inflation has fallen from above 9 per cent before FIT to a range of 3.8 - 4.3 per cent during FIT, indicating that 4 per cent is the appropriate level of the inflation target for India.

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First Published: Feb 26 2021 | 3:42 PM IST

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