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Inflation Target at 4% is appropriate for India: RBI

  • IASbaba
  • December 30, 2020
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Inflation Target at 4% is appropriate for India: RBI

Part of: GS Prelims and GS-III – Economy 

In news

  • Recently, a working paper titled “Measuring Trend Inflation in India” was released by RBI.
  • According to the paper, maintaining the inflation target at 4% is appropriate for India. 

Key takeaways 

  • The paper seeks to estimate trend inflation in India. 
  • The 4% target for inflation — with an upper tolerance limit of 6% and a lower limit of 2% — was set by the Centre in consultation with the RBI in 2016 and its validity expires on March 31, 2021.
  • The paper finds a steady decline in trend inflation to 4.1- 4.3% since 2014.
  • A target set too below the trend imparts a deflationary bias to monetary policy. 
  • Similarly, a target that is fixed above the trend renders monetary policy too expansionary and prone to inflationary shocks. 
  • Hence, maintaining the inflation target at 4% is appropriate for India.

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