Radical changes in Inflation Targeting Regime could be Counterproductive: NCAER

Posted 21 Aug 2024

2 min read

National Council for Applied Economic Research (NCAER) released a Working Paper titled ‘Inflation Targeting in India: A Further Assessment’ which assessed India’s inflation-targeting regime at the completion of 8-year.

Inflation Targeting Regime in India

It provides that primary objective of the monetary policy is to maintain price stability, while keeping in mind the objective of growth.
Introduced in 2015 through Monetary Policy Framework Agreement between the Union Government and the RBI.
- Later in 2016, the RBI Act was amended which gave statutory basis for a Monetary Policy Framework and the Monetary Policy Committee (MPC).
Target: RBI to target Consumer Price Index (CPI) inflation at 4%, with a tolerance band of +/- 2% (i.e., 2-6%) subject to review every 5 years.
MPC consists of 6-members - 3 ex officio members from the RBI and 3 external members appointed by Union Government.

Key findings of the Paper

Broadening the mandate of the RBI: To include responsibility for corporate bond market development, etc., can reduce time and focus on achieving price stability and hinder the accountability of the RBI.
Moving to Core inflation against Headline inflation: Neglecting food price inflation for an extended period can have negative consequences.

Headline vs. Core Inflation

Headline Inflation: It is based on the CPI – Combined which is a measure of total inflation in the economy.
- It measures price rise in food, fuel, and all other commodities.
Core Inflation: It measures price rise in commodities, excluding food and fuel items which are more volatile in nature.