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Inflation targeting

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Inflation targeting:


Context:

The Centre has decided to retain the inflation target of 4%, with a tolerance band of +/- 2 percentage points for the Monetary Policy Committee of the RBI for the coming five years.

What is inflation targeting?

  • It is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
  • The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.

Inflation Targeting Framework:

Now there is a flexible inflation targeting framework in India (after the 2016 amendment to the Reserve Bank of India (RBI) Act, 1934).

Who sets the inflation target in India?

The amended RBI Act provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once every five years.

Current Inflation Target:

The Central Government has notified 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.

InstaLinks:

Prelims Link:

  1. What is the current inflation target?
  2. Who sets it?
  3. What is the monetary policy committee (MPC)?
  4. Functions.
  5. Composition.

Sources: the Hindu.