Inflation debate: Current target holds merit, but 4% midpoint needs teeth

In inflation-averse Indian polity, people complain about high inflation and high prices all the time. Thus, there may also be handsome electoral dividends from low inflation

The Reserve Bank of India (RBI) has been following a flexible inflation targeting (FIT) approach since its monetary policy framework agreement (MPFA) with the Government of India in February 2015. The year-on-year inflation target of 4 per cent, with a tolerance band of 2  to 6 per cent, was announced in the Gazette on August 5, 2016. The new Section 45ZA in the amended RBI Act requires the government, in consultation with the RBI, to determine the inflation target in terms of the consumer price index (CPI) once every five years.

 

After the first quinquennial review, the validity of the