RBI for retaining retail inflation band for five years

The cur rent inflation target of 4% with a +/-2% tolerance band is appropriate for t he next five years, the Reserve Bank of India (RBI) said in a report.

The country adopted the flexible inf lation targ et (FIT) frame work in 20 16. The inf lation targ et of 4% and the lo wer and upper tolerance bands were set at 2% and 6%, r espectively. The next r eview of the inflation targ et is due bef ore March 31, 2021.

Basis the band, the monetary polic y is decid ed by a six-member committee headed by the RBI governor.

"The cur rent numerical framework f or defining price stability, i.e., an inflation target of 4% with a +/2% tolerance band, is appropriate f or the next fi ve years," the Report on Currency and Finance (R CF) for the year 2020-21 said.

The per iod of stud y in this report, the RBI said, is from October 2016 to March 2020, commencing with the formal operationalisation of the FIT framework in the country b ut ex cluding the period of the COVID-19 pandemic in vie w of da ta distortions.

The RBI said the contents of the r eport, its findings , views and conc lusions ar e entirely those of the contributors and do not represent the vie ws of the central bank.

As per the r eport, during the period under r eview, headline CPI inflation averaged 3.9% in the count ry with a dec line in inf lation volatility, at testing to the success of FIT in terms of its primary mandate.

The r eport said tr end inflation has f allen fr om above 9% bef ore FIT to a range of 3.8-4.3% during FIT, indica ting tha t 4% is the appropriate level of the inflation target for India.

Threshold inf lation above which g rowth is unambiguously impa ired ranges betw een 5 and 6% in India, the r eport said adding tha t this indi cates that an inflation rate of 6% is the a ppropriate upper tolerance limit for the inflation target.