TheNFAPost Podcast

Bengaluru, NFAPost: Reserve Bank of India (RBI) has released a fresh report on 26th February this year with its theme highlighting the concept of “Reviewing the Monetary Policy Framework”.

This assumes significance in the context of reviewing the inflation target by March 2021 against the backdrop of structural reforms attributed to macroeconomic and financial landscape that have inspired several central banks to undertake policy framework reviews.

RCF Report Mandated Price Stability and Inflation Targeting

In its report on currency and finance (RCF) for the year 2020-21, it is noted that “the current numerical framework for defining price stability” or “an inflation target of 4 per cent with a +/- 2 per cent tolerance band, is appropriate for the next 5 years.”

The report also added that the “period of study in this report is from October 2016 to March 2020 commencing with the formal operationalisation of the flexible inflation targeting (FIT) framework in India but excluding the period of the COVID-19 pandemic in view of data distortions.”

As LiveMint reports, Finance Minister Nirmala Sitharaman had recently suggested that the government would review the inflation target band towards the end of the five-year term of the Monetary Policy Committee (MPC). Consequently, the monetary policy would be reviewed by the MPC under the guidance of the RBI governor to keep the inflation target within the acceptable limits.

Retail Inflation

Food and vegetable prices took a downward plunge in January this year, buoyed by the easing of retail inflation to a 16-month low of 4.06%, according to the government data released on Friday.

It may be noted that the Consumer Price Index (CPI)-based retail inflation has stood within RBI’s target range for the second month in a row. In other words, the inflation target range was successfully controlled within the RBI permissible limits of 4 per cent (with +/- 2 per cent on either side).

The retail inflation has remarkably come down to 4.59 per cent in December 2020 from its peak of 7.59 per cent in January 2020. This appears to be in line with the trend inflation data which shows a plunge from 9 per cent before Flexible Infaltion Targeting (FIT) to a range of 3.8 to 4.3 per cent during FIT, according to the RBI report.

The report concludes that “the primary focus of FIT on price stability augurs well for further liberalisation of the capital account and eventual interntionalisation of the Indian rupee.”


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