Reserve Bank seeks public views on shift from 4% inflation target to growth-focused policy

Mumbai: The Reserve Bank on Thursday sought public feedback on whether its monetary policy should continue to target 4 per cent retail inflation or set new parameters to boost growth while maintaining stability in the fast-growing large economy.

While emphasising that the flexible inflation targeting (FIT) regime has been successful, the central bank is also looking at whether core inflation would be the best guide for monetary policy.

Following a Monetary Policy Framework Agreement with the government in 2015, India formally adopted the inflation targeting framework in 2016. The government has mandated the RBI to maintain a Consumer Price Index (CPI) inflation target of 4 per cent with a tolerance band of +/- 2 per cent during 2016-21. The same parameters were retained for the subsequent five years (April 1, 2021, to March 31, 2026).

The RBI Governor-headed six-member Monetary Policy Committee (MPC) determines the policy rate required to achieve the inflation target.

Against the backdrop of the next review of the target to be effective from April 1, 2026, and the significant changes in the global and domestic economic environment, the RBI said it has undertaken a review of the nature and format of the inflation target.

Towards this, it has come out with a discussion paper seeking feedback from stakeholders on four questions: Whether headline inflation or core inflation would best guide the conduct of monetary policy, given evolving relative dynamics of food and core inflation and the continuing high weight of food in the CPI basket?

Whether the 4 per cent inflation target continues to remain optimal for balancing growth with stability in a fast-growing, large emerging economy like India?

Should the tolerance band around the target be revised in any way, including whether the tolerance band be narrowed, widened or fully done away with?

Should the target inflation level be removed, and only a range be maintained within the overall ambit of maintaining flexibility without undermining credibility? The discussion paper said the inflation performance over the nine years of FIT witnessed a hump-shaped performance, with the first three years and the last three years remaining aligned to the target.

The middle three years showed an inclination towards the upper tolerance band, confronted with a once-in-a-century pandemic followed by the Russia-Ukraine conflict that drove up the inflation trend worldwide during this period.

“The experience of the FIT framework, introduced in the year 2016 and first reviewed in 2021, has broadly performed well. From the inception of FIT till about the end of 2019, inflation was low and stable, averaging around 4 per cent,” it said.