Inflation Targeting

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The government has kept the inflation-targeting framework (4%, with a tolerance band of +/- 2 percentage points) for the RBI unchanged for the five-year period beginning 1 April 2021.

Background

• 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 percent and the lower tolerance limit of 2 per cent.
• Now there is a flexible inflation targeting framework in India (after the 2016 amendment to the Reserve Bank of India (RBI) Act, 1934).
• 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.

What is Inflation Targeting?

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

(Image Courtesy: ET)

Inflation

• • It refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing etc.
  • It measures the average price change in a basket of commodities and services over time.
    • The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
  • It is indicative of the decrease in the purchasing power of a unit of a country’s currency.
  • This is measured in percentage.

Source: LM