Dealing with cost-push inflation

At present, an important reason for the large leeway around the inflation target lies in the behaviour of the prices of oil and food, which can push prices more generally

The Reserve Bank of India (RBI) does not have a policy tool to deal with one kind of inflation, viz. cost-push inflation. However, it is often not realised that the government does have such a policy tool. Before I explain this “out-of-the-box” solution, let me put the issue in context.

In 2016, the RBI was formally given the mandate till March 31, 2021, to target 4 per cent inflation with a leeway of plus/minus 2 percentage points. Now the specific targets are under review. What should we do?

The leeway of 2 per cent on a base target of 4 per cent