Recently, centre has announced that the inflation target will remain unchanged from what had prevailed in the last five years.
What does this mean?
Inflation targeting remains at the centre of the monetary policy framework.
The fiscal and monetary authorities are giving importance on price stability in the macro-economic development.
This announcement is relevant at a time when inflation pressures are mounting in the economy which is struggling to regain from the COVID-19 pandemic.
As per the latest data, retail inflation accelerated by almost 100 basis points to a three-month high of 5.03%, with food and fuel costs continues to remain volatile.
Why flexible inflation targeting is required?
In December, RBI in its working paper titled ‘Measuring Trend Inflation in India’ underscored the importance of ensuring the appropriateness of the inflation target.
There is a steady decline in trend inflation to a 4.1%-4.3% band since 2014 and inflation target lower than the trend can impart a deflationary bias which will dampen economic momentum.
And any inflation target above the trend could give rise to expansionary monetary conditions which would likely lead to inflation shocks.
RBI in its report on Currency and Finance — themed ‘Reviewing the Monetary Policy Framework’ — made it clear that the current framework served the economy well.
This is supported by a decline in inflation volatility and more credible anchoring of inflation expectations.
