Inflation targeting has worked for India, but transparency must improve

With fiscal pressures rising worldwide and monetary independence under strain, the anchor must remain

The Reserve Bank of India (RBI) has initiated the second statutory review of the flexible inflation targeting (FIT) framework it has used since 2016. Its recent discussion paper seeks public feedback on whether FIT, which has anchored the Monetary Policy Committee’s (MPC’s) decisions for nearly a decade, remains relevant for India’s economy. 

The paper raises four questions: Should the RBI target headline or core inflation, given food’s dominant weight in retail price index? Is the 4 per cent inflation target with a tolerance band (+/- 2 per cent) still appropriate for a fast-growing economy? Should the tolerance band be adjusted