1 Overall inflation scenario is perhaps the worst after inflation targeting was adopted
India’s inflation targeting framework first came into effect for the period from August 2016 to March 2021. Under the new agreement between RBI and the government, the central bank was expected to maintain the benchmark inflation rate as measured by the Consumer Price Index (CPI) at four percent within a band of plus minus two percent. The central bank would have failed in its mandate if inflation stayed outside this target for three consecutive quarters. The arrangement was renewed for another five years in 2021.
A simple look at retail and wholesale inflation measures suggests that the inflation scenario is the most challenging at the moment since the inflation targeting framework was adopted. While the benchmark inflation rate stayed above the 6% mark for four consecutive quarters beginning March 2020, there is some ground to argue that price pressures were not as broad-based then. The Wholesale Price Index (WPI), which is the best available proxy for producer prices was still showing a low growth rate.
To be sure, the disruption in supply chains on account of the pandemic – India imposed one of the most stringent lockdowns in the world which went on for 68 days beginning March 25, 2020 – must have generated tailwinds for inflation which MPC could not have foreseen. The inflation situation now is quite different. WPI is at its highest ever levels and CPI has once again surged above the upper limit of RBI’S tolerance band in the March 2022 quarter. Most experts, MPC included, see inflation rising going forward.