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What is inflation targeting? How does the inflation targeting framework operate in India?
Inflation targeting is the monetary policy framework in which a country's central bank explicitly sets an inflation rate target and makes it public to guide expectations towards the stability of the economy. Then, interest rates and other monetary tools should be adjusted appropriately to steer it tRead more
- Inflation targeting is the monetary policy framework in which a country’s central bank explicitly sets an inflation rate target and makes it public to guide expectations towards the stability of the economy. Then, interest rates and other monetary tools should be adjusted appropriately to steer it toward this target of price stability and economic growth.
- The Reserve Bank of India adopted a flexible inflation-targeting framework in 2016. This framework is defined by a target of 4% consumer price index inflation, with a ±2% tolerance band—in effect, therefore, the acceptable range would be 2%–6%. The RBI’s Monetary Policy Committee, which meets bi-monthly, has the mandate to set policy rates to achieve this target. If the rate of inflation remains above or below target for three consecutive quarters, the MPC is under a duty to write to the governor, explaining the reasons and proposing corrective measures.
- The RBI has been intervening in the management of challenges to global supply chain disruptions and fluttering commodity prices since 2024. Current policy is oriented to supplying the economy below the tolerance limit of 2–6 per cent while supporting recovery post-pandemic. In its recent MPC decisions, it has maintained a neutral tone on balancing growth and inflation; policy repo rate at 6.50 per cent.
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