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Current inflation target band appropriate for next 5 years: RBI report

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Current inflation target band appropriate for next 5 yearsIn accordance with the internal report from the Reserve Bank of India (RBI) namely ‘Report on Currency and Finance (RCF) for the year 2020-21″ on the theme “Reviewing the Monetary Policy Framework”, India’s medium-term inflation target of 4% with a +/-2 % tolerance band is appropriate for the country. This is in lieu of the RBI’s flexible inflation targeting (FIT) mandate.

  • India adopted the flexible inflation targeting framework in 2016 and the government is due to review the same before March 31, 2021.
  • The period of study in this report is from October 2016 to March 2020.

Key Points:

–Headline CPI inflation averaged 3.9% in India with a decline in inflation volatility.

–Trend inflation has fallen from above 9% before FIT to a range of 3.8-4.3 % during FIT

–Threshold inflation ranges between 5 and 6%.

— An inflation rate of 6 % is the appropriate upper tolerance limit for the inflation target.

–The current numerical framework for defining price stability, i.e., an inflation target of 4% with a +/-2% tolerance band, is appropriate for the next five years

–During the FIT period, monetary transmission has been full and reasonably swift across the money market but less than complete in the bond markets.

–There has been an improvement in transmission to lending and deposit rates of banks, external benchmarks across all categories of loans and deposits could improve transmission further,

–On global front, inflation targeting emerging market economies (EMEs) have generally lowered their inflation targets and narrowed tolerance bands.

–There is a need to enhance the RBI’s sterilisation capacity to deal with surges in capital flows

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Recent Related News:

i.On December 29, 2020, Reserve Bank of India (RBI) released “Report on Trend and Progress of Banking in India 2019-20” under the broad theme of impact of COVID-19 on banking and non-banking sectors, and the way forward.

ii.In accordance with RBI’s “Quarterly Basic Statistical Returns (BSR)-1: Outstanding Credit of Scheduled Commercial Banks (SCBs), September 2020”, Bank credit growth on y-o-y basis stood at 5.4% in Q2FY21 compared to 5.7% growth in the Q1FY21.

About Reserve Bank of India (RBI):

Formation– 1 April 1935
Governor– Shaktikanta Das
Headquarters– Mumbai, Maharashtra
Deputy Governors– 4 (Bibhu Prasad Kanungo, Mahesh Kumar Jain, Michael Debabrata Patra, and M Rajeswar Rao)