What is the Reserve Bank of India's inflation target?

The Reserve Bank of India (RBI) currently targets retail inflation within a band of 2-6%, with an optimal point target of 4%.

Should the RBI focus on headline or core inflation?

Most economists and industry sources recommend the RBI continue focusing on headline inflation, as it better reflects consumer price pressures.

Has India's inflation targeting framework been successful?

Yes, the flexible inflation targeting framework has largely succeeded in anchoring inflation expectations and reducing price volatility.

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RBI's Inflation Target: Status Quo or Overhaul?

5 Jan

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Summary

Most economists favor retaining the 2-6% inflation target.
Headline inflation target is preferred for policy clarity.
Current framework has anchored expectations and reduced volatility.

RBI's Inflation Target: Status Quo or Overhaul?

The Reserve Bank of India (RBI) is expected to maintain the core elements of its flexible inflation targeting (FIT) framework, according to a majority of economists. They believe the current model, which targets headline inflation within a 2-6% band and focuses on a 4% optimal target, has been beneficial for India's economy. This stance is supported by the framework's success in anchoring inflation expectations and stabilizing core inflation.

Experts advocate for continuing the focus on headline Consumer Price Index (CPI) inflation, arguing that it better reflects the price pressures faced by consumers, especially low and middle-income households where food spending is significant. While the 2-6% band was set lower in 2016, adjustments are not anticipated in the near term, with potential reviews possibly occurring over the next 5-10 years.

Economists stress that maintaining a clear point target for inflation, such as 4%, is crucial for public understanding and policy communication. Deviating from this could lead to unnecessarily restrictive monetary policy or signal a reduced focus on the inflation mandate. The FIT framework has largely kept inflation within the target band and decreased its volatility.