Inflation targeting in India
Inflation targeting in India is the current inflation target band (4% +/-2%) is appropriate for the next 5 years. It is a monetary policy where the Reserve Bank (Central Bank of any country) follows an explicit target for the inflation rate for the medium term.
It announces this inflation target to the public. Price stability is the best thing that monetary policy can do to support the long-term growth of the economy.
Price stability is achieved by controlling inflation. The reserve bank of India uses its main short-term monetary instrument.
The RBI will raise or lower the interest rate based on the target inflation rate. The common belief is that raising the interest rates usually economy to rein in inflation and lowering interest rates usually accelerates the economy, thereby boosting inflation.
It is also believed to be supporting economic growth and stability. The first countries to implement the fully-fledged inflation targeting were New Zealand, Canada, and Uk.
When did India adopt inflation targeting?
India adopted flexible inflation targeting (FIT) in June 2016 to place price stability. It is defined in terms of a target CPI (Consumer Price Index) inflation, as the prime objective of the monetary policy.
Why does the 4% inflation target?
If the inflation expectation fall, the interest rates would decline too. By seeking inflation that averages 4% over time, it will help to ensure longer-run inflation expectations remain well-anchored at 4%.
By keeping the inflation rate low and stable at 4%, helps everyone to plan for the future. If inflation is too high or is hard for Businesses to set the right prices. Also, it is hard for people to plan their spending.
Who decides the inflation target in India?
As per the Amendment of the RBI Act, the inflation target is set by the Government of India in consultation with the Reserve Bank once in Five Years.
Does inflation targeting work?
Inflation targeting lowers the unemployment rate and keeps the prices stable. In order for Inflation targeting to work, the RBI must clearly signal its intentions to raise or lower interest rates.