India retains inflation target at 4% for next five years

New Delhi: India has kept its retail inflation target for the central bank unchanged at 4% ( plus or minus 2 percentage points), opting for continuity and price stability as global shocks from geopolitical tensions threaten to stoke price pressures.

The finance ministry Wednesday notified inflation targeting framework for another five years through March 2031.The decision followed deliberations between the government and the Reserve Bank of India (RBI), as per the notification by the Department of Economic Affairs.

While the target makes it obligatory for the RBI to use its monetary tools to keep price pressure within the proposed band, it also influences the government’s fiscal measures, as policies by both are crucial for maintaining price as well as macro-economic stability.

As per the framework, if the central bank fails to meet the target for any three consecutive quarters, it will have to send a report to the central government stating the reasons for the failure, and propose time-bound remedial measures to realise the target.

The government had, in May 2016, amended the RBI Act to mandate the flexible inflation-targeting framework under which it would set a retail inflation target, with upper and lower price bands, every five years in consultation with the RBI. The targets have been maintained since the 2016 notification. According to an RBI discussion paper floated in August last year, average consumer price index (CPI) inflation dropped from 6.8% during the four years before the adoption of the framework (2012-16) to 4.9% since its adoption, as per the old CPI series data. Retail inflation remained within the 2-6% range three-fourth of the time between 2016 and 2021 and two-third of the time subsequently.

CPI inflation hit a 10-month high of 3.21% in February, up from 2.74% in the previous month, according to the new series data.