Inflation Target at 4% is appropriate for India: RBI

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.