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
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