RBI’s Paper on Inflation- Highlights

A working paper of the Reserve Bank of India (RBI) has recommended maintaining the inflation target at 4 percent for the country. As per the paper, it is the appropriate inflation target for the country.

Key Points

  • The paper has been titled ‘Measuring trend inflation in India’.
  • This RBI working paper has been authored by Michael Debabrata Patra and Harendra Kumar Behera.
  • The paper has found that there is a steady decline in inflation to 4.1-4.3 percent since the year 2014.
  • According to the paper, setting a target below the inflation trend may impart a deflationary bias to monetary policy as it will overkill as compared to what the economy can bear for achieving the inflation target.
  • Also, setting a target above the inflation trend is not suitable for India. Thus, India should maintain an inflation target of 4 percent.
  • As per the paper, significant changes in the macroeconomic ecosystem must be considered while setting monetary policy.
  • The RBI working paper also found that the concept of inflation trend is important to the design and conduct of monetary policy.
  • The flexible inflation targeting (FIT) was formally adopted by India in June 2016 to place price stability, defined in terms of target CPI inflation, as the major aim of the monetary policy.
  • As per the present mandate, the RBI has to maintain headline inflation at 4% by March 31, 2021, with a lower tolerance of 2% and an upper tolerance of 6%.

Monetary Policy Committee Meeting

In the last monetary policy meeting on December 4, the RBI has kept all the major policy rates unchanged. In the meeting, the governor has projected a CPI inflation of 6.8% for the December quarter and CPI inflation at 5.8% for the March quarter of the current financial year.