Current inflation target band appropriate for next 5 years: RBI report

The current inflation target of 4 per cent with a +/-2 percent tolerance band is appropriate for the next five years, the Reserve Bank of India (RBI) said in a report. The country adopted the flexible inflation target (FIT) framework in 2016. The inflation target of 4 per cent and the lower and upper tolerance bands were set at 2 per cent and 6 per cent, respectively.

The next review of the inflation target is due before March 31, 2021. The monetary policy is decided by a six-member committee headed by the RBI governor. The period of study in this report is from October 2016 to March 2020, commencing with the formal operationalisation of the FIT framework in the country but excluding the period of the COVID-19 pandemic in view of data distortions.

The contents of the report, its findings, views and conclusions are entirely those of the contributors and do not represent the views of the central bank. As per the report, during the period under review, headline CPI inflation averaged 3.9 per cent in the country with a decline in inflation volatility, attesting to the success of FIT in terms of its primary mandate. The trend inflation has fallen from above 9 per cent before FIT to a range of 3.8-4.3 per cent during FIT, indicating that 4 per cent is the appropriate level of the inflation target for India. Threshold inflation above which growth is unambiguously impaired ranges between 5 and 6 per cent in India, the report said adding that this indicates that an inflation rate of 6 percent is the appropriate upper tolerance limit for the inflation target.

Source: Business Standard