Inflation targeting in India
About:
- To keep price rises under control, the Centre mandated the RBI in 2016 to manage retail inflation at 4% for a five-year term ending March 31, 2021, with a margin of 2% on either side.
- The Consumer Price Index (CPI) measures changes in the retail prices of goods and services purchased by households on a daily basis.
- Under the Reserve Bank of India Act 1934, the inflation target for the period 1 April 2021 to 31 March 2026 has been maintained at the same level as for the preceding 5 years.
Background:
- In 2015, the central bank and the government agreed on a policy framework with the primary goal of maintaining price stability while keeping growth in mind.
- In 2016, the Flexible Inflation Target (FIT) was established. The Reserve Bank of India Act, 1934 was altered to create a legal framework for the FTI.
- The revised Act mandates that the government, in cooperation with the RBI, set the inflation target once every five years.
Targeting Inflation:
- It is a central banking policy that focuses on altering monetary policy to reach a set yearly inflation rate.
- Inflation targeting is known to improve monetary policy stability, predictability, and transparency.
Strict Targeting of Inflation:
- It’s used when the central bank’s sole aim is managing inflation as near to a particular objective as possible.
- Flexible inflation targeting is used when the central bank is worried about a variety of other factors, such as interest rate, exchange rate, output, and employment stability.
About the Monetary Policy in India:
- It refers to the central bank’s macroeconomic policies. It is a demand-side economic policy in which the government of a country manages the money supply and interest rate in order to achieve macroeconomic goals such as inflation, consumption, growth, and liquidity.
- The Reserve Bank of India’s monetary policy aims to manage the quantity of money in order to meet the needs of various sectors of the economy while also increasing the rate of economic growth in India.
- Open market operations, bank rate policy, reserve system, credit control policy, moral persuasion, and a variety of additional instruments are used by the RBI to implement monetary policy.
About the MPC:
- Under the Reserve Bank of India Act, 1934, it is a statutory and institutionalised framework for ensuring price stability while pursuing the goal of growth.
- The committee’s ex-officio Chairman is the Governor of the Reserve Bank of India.
- The MPC determines the required policy interest rate (repo rate) to meet the inflation objective (4 percent ).
- In 2014, the Monetary Policy Group was recommended by an RBI-appointed committee led by then-deputy governor Urjit Patel.
