INFLATION TARGET

Dec. 30, 2020

Maintaining the inflation target at 4% is appropriate for India, according to a working paper titled “Measuring Trend Inflation in India” released by RBI.

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The paper seeks to estimate trend inflation in India to find the answer to a question that goes to the root of flexible inflation targeting (FIT) – is the choice of the target for inflation consistent with its trend?
The 4% target for inflation — with an upper tolerance limit of 6% and a lower limit of 2% — was set by the Centre in consultation with the RBI in 2016 and its validity expires on March 31, 2021.
The paper finds a steady decline in trend inflation to 4.1- 4.3% since 2014.
A target set too [significantly] below the trend imparts a deflationary bias to monetary policy because it will go into overkill relative to what the economy can intrinsically bear in order to achieve the target, the paper said.
Analogously, a target that is fixed above the trend renders monetary policy too expansionary and prone to inflationary shocks and unanchored expectations. Hence, maintaining the inflation target at 4% is appropriate for India.

Source : The Hindu