BS BFSI Summit: 'Inflation-targeting worked, no major revamp required'

At BS BFSI Insight Summit 2025, a high-level panel of economists said that flexible inflation targeting has largely worked in keeping inflation under control and no major revamp is required

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Almost a decade after India shifted to a formal inflation-targeting regime under the Monetary Policy Committee (MPC) framework of the Reserve Bank of India (RBI), a high-level panel of economists said that the flexible inflation targeting has largely worked in keeping it under control and no major revamp is required.

 

Speaking at a session moderated by A K Bhattacharya of Business Standard, Chetan Ghate, professor, Economics and Planning Unit, Indian Statistical Institute, said the success of inflation targeting has to be judged in terms of establishing the credibility of nominal anchor.

 

“Prior to inflation targeting, we followed a multiple indicator approach. RBI was looking at lots of different indicators and financial markets did not understand what the markets was doing. So, now we have gravitated towards another anchor where nominal anchor is credibly established,” he said, adding that one should not judge the success of inflation targeting by declines in inflation but by establishing a credible nominal anchor, by the decline in volatility of key macro parameters, anchoring inflation expectations.

 

“Inflation targeting has by and large been a success. It does not need a major rethink,” he said.

 

According to Ashima Goyal, emeritus professor of Economics, Indira Gandhi Institute of Development Research, inflation targeting was rushed through without domestic debate to understand in what ways inflation targeting suits an economy like India.

 

“This review is an opportunity to explain to the public at large, and get views from the market, academics so that there is a convergence on how inflation targeting can be adapted to suit an economy like India,” she said, adding that inflation targeting has worked.

 

“There is a perceptible fall in inflation but when you look at growth, we see in periods where the real interest rate is 2 or greater than 1.5 per cent, we normally had a slowdown in growth,” Goyal said, adding that, generally, there is a growth sacrifice when real rates were allowed to go too high. But the answer is not to move away from inflation.

 

The Reserve Bank of India (RBI) in August floated a discussion paper seeking feedback on four critical questions, including the appropriateness of persisting with the 4 per cent goal and if the focus should be on headline or core inflation. The paper also sought inputs from stakeholders on whether the RBI should target a tolerance band or a specific number, and if the tolerance band of +-2 per cent should be narrowed or widened.

 

“I don’t see any reason for us to bring down the central inflation target below 4 per cent. Even the RBI’s discussion paper indicates that trend inflation lies between 4.1 per cent and 4.7 per cent, which supports maintaining the current target. What’s more important is ensuring that inflation stays within the tolerance band most of the time — because in the last 106 months, inflation breached the upper limit of 6 per cent on 28 occasions. Once we achieve consistency within the band, only then can we think of narrowing it,” said Janak Raj, senior fellow and leads the macroeconomic segment in the Growth, Finance and Development vertical at CSEP.

 

Raj also served as an executive director in the RBI and as a member of its statutory MPC.

 

“There has also been a suggestion to move towards a simple range, say 4–6 per cent, instead of a central target with a tolerance band. I don’t think that’s a good idea, because it complicates communication — markets won’t know whether the target is 4.2 per cent, 4.5 per cent, or 5.6 per cent, and that uncertainty can be counterproductive. Moreover, there’s no empirical evidence anywhere that a range-based framework performs better than a central target with a defined tolerance band,” he said.

 

“Our performance was reasonably successful given the context, and since then, inflation has been mean-reverting around 4 per cent. The goal now should be to use inflation targeting to bring the mean lower over time — as countries like Brazil have done by pulling it down to 3 per cent — but this isn’t the stage for that. Any review should retain the current target,” said Mridul Saggar, professor, IIM Kozhikode. 

 

Saggar was earlier the executive director, RBI, overseeing the central bank’s monetary policy and economics research functions.

 

“Frankly, I am puzzled why the Reserve Bank even called it a ‘monetary policy framework review.’ That framing risks undermining the credibility of our current system. It should have been presented as an inflation-targeting review. By calling it a broader framework review, we’re reopening debates about multiple-indicator approaches or exchange-rate targeting — which distracts from the success of what’s already working well,” he said.

 

“And on core inflation, I must add — apart from the Bank of Thailand, which tried and abandoned it between 2000 and 2014, no central bank uses core inflation targeting. Even advanced economies stick to headline inflation. We should be cautious not to overcomplicate what has served us effectively.”