Inflation Target Band Appropriate For Next Five Years: RBI Report

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Inflation Target Band Appropriate For Next Five Years: RBI Report

Globally, inflation targeting EMEs have lowered inflation targets and narrowed tolerance bands.

The central bank’s medium-term inflation target of 4 per cent with a tolerance band of 2 per cent is appropriate for the next five years under its flexible inflation targeting (FIT) mandate, said a Reserve Bank of India (RBI) report on Friday.

The currency and finance (RCF) report for the year 2020-21 further points at emerging market economies generally lowering inflation targets and narrowing tolerance banks.

“Trend inflation to which actual inflation converges after a shock provides an appropriate benchmark for the inflation target; trend inflation has fallen from above 9 per cent before FIT to a range of 3.8 per cent-4.3 per cent during FIT,” the RBI said in its release.

India adopted the flexible inflation targeting framework in 2016 and the government is due to review the same in the near future.

“The current numerical framework for defining price stability, i.e., an inflation target of 4 per cent with a +/-2 per cent tolerance band, is appropriate for the next five years,” RBI said.

During the period under review, headline consumer price index (CPI) inflation averaged 3.9 per cent in India with a decline in inflation volatility, testimony to the success of FIT in terms of its primary mandate.

Globally, inflation targeting emerging market economies (EMEs) have generally lowered their inflation targets and narrowed tolerance bands.

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