In 2016, India shifted to an inflation targeting regime. The inflation target of 4 per cent with a band of plus/minus 2 per cent was initially set for a five-year period ending in 2021. Subsequently, in March 2021, the government retained the inflation target for another five years. With the second review of the framework due early next year, the RBI has now released a discussion paper on the monetary policy regime. The paper examines how inflation targeting has fared in India over the past nine years, and also raises several questions over its structure.
On balance, shifting to this framework has “served India well”. Inflation has averaged 4.9 per cent after the shift, as compared to an average of 6.8 per cent in the period before that. The framework has provided the Monetary Policy Committee the flexibility to deal with challenging economic situations — during the pandemic years, for instance, it allowed for greater weightage to be attached to growth priorities in the decision matrix. The regime has also brought about accountability — when inflation stayed above the upper threshold of 6 per cent, the RBI was required to send a report to the government detailing why the target was not met and the corrective action that needed to be taken. Alongside, publication of the minutes of the committee meeting, which are released with a gap of two weeks, has brought about transparency in the decision-making process by detailing the thinking and rationale for the decisions of each committee member. Further, by putting in place a six-member committee to decide on policy, more voices have been incorporated in decision-making.
