On Friday, the Reserve Bank of India (RBI) said it favoured keeping the current inflation target set for the next five years in 2016, ahead of an upcoming government review. The central bank of India is expected to work to hold retail inflation at 4%, with a tolerance limit of 6% and a lower limit of 2% under its flexible inflation targeting (FIT) strategy. The six-member Monetary Policy Committee (MPC), led by the Governor of the RBI, decides on policy rates that take this objective into account.
“The current numerical framework for defining price stability, i.e., an inflation targets of 4% with a +/-2 per cent tolerance band, is appropriate for the next five years," RBI said in its report titled Reviewing the Monetary Policy Framework. Finance minister Nirmala Sitharaman recently said the government will review the target band as the term of the MPC ends on 31 March. The government will notify the average and the band within which the FIT will operate thereafter. “It is important to recognize that while setting a single target/tolerance band for the next five years, structural changes that may materialize or the type of shocks that may hit the economy are difficult to anticipate fully. Hence, flexibility must be built into the framework, without undermining the discipline of the inflation target, which has to be forward-looking to ensure that inflation expectations are firmly anchored over the medium term to facilitate decisions on investment, savings and consumption," the report said. The RBI report also suggested changes in the inflation targeting framework for better transparency, accountability and operational efficiency. This includes modifying the definition of failure from the current three consecutive quarters norm of inflation remaining outside the tolerance band, to four consecutive quarters. The MPC may also consider providing a more explicit forward guidance on the interest rate path at a future date, as the projection process is strengthened further over time, the report suggested.