INFLATION TARGETING

INFLATION TARGETING

Subject : Economics

Context : India expected to retain current inflation targeting framework: Moody’s Analytics.

Concept :

• Stressing that India’s retail inflation has been breaching the Reserve Bank of India’s (RBI’s) 4% inflation target for the past eight months, the financial intelligence firm said India and Philippines are the two notable exceptions — in Asia — where inflation is beyond the comfort level.
• “Volatile food prices and rising oil prices led India’s CPI (consumer price inflation) to exceed the upper band of 6% several times in 2020, inhibiting the RBI’s ability to keep accommodative monetary settings in place during the height of the pandemic.

Inflation Targeting by RBI:

• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
• Under Section 45ZA of the RBI Act1934, the Centre, in consultation with the central bank, fixed the inflation target/Flexible Inflation Target(FIT) for the period between August 5, 2016 and March 31,2021, at 4 per cent, with upper tolerance level of 6 percent and lower tolerance level of 2per cent.
• In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
• The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.
• Accordingly, the Central Government has notified 4 percent (+/- 2%) Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021.