{"id":60396,"date":"2025-08-22T11:05:48","date_gmt":"2025-08-22T05:35:48","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=60396"},"modified":"2025-08-22T11:05:48","modified_gmt":"2025-08-22T05:35:48","slug":"rbi-cautions-against-raising-indias-4-inflation-target","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/rbi-cautions-against-raising-indias-4-inflation-target\/","title":{"rendered":"RBI Cautions Against Raising India\u2019s 4% Inflation Target"},"content":{"rendered":"<h2><b>RBI Inflation Target Latest News<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI, in its new discussion paper on the monetary policy framework, cautioned that raising India\u2019s 4% inflation target now would undermine the credibility of the framework and risk reversing the macroeconomic stability gains achieved over the past decade.<\/span><\/li>\n<\/ul>\n<h2><b>RBI\u2019s Discussion Paper on Monetary Policy<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Reserve Bank of India (RBI) has released its long-awaited discussion paper on the country\u2019s monetary policy framework.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It warns that <\/span><b>raising the<\/b> <b>current 4% inflation target could undermine the credibility of the framework<\/b><span style=\"font-weight: 400;\"> and undo the policy and institutional gains achieved over the last decade.<\/span><\/li>\n<\/ul>\n<h3><b>Key Questions for Feedback<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The central bank has invited public feedback on four crucial issues:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Whether monetary policy should target headline or core inflation.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">If the 4% inflation target remains optimal for balancing growth and stability.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Whether the 2\u20136% tolerance band needs revision or removal.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Whether the explicit 4% target should be dropped in favour of only a range.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><b>Risks of Raising or Lowering the Target<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The paper highlights that raising the target in today\u2019s environment of global geopolitical and economic uncertainty could be interpreted as a <\/span><b>dilution of the inflation targeting framework<\/b><span style=\"font-weight: 400;\">, weakening investor confidence.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Conversely, lowering the target below 4% would not suit India\u2019s current economic conditions.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Recently, <\/span><b>S&amp;P Global Ratings<\/b><span style=\"font-weight: 400;\"> upgraded India\u2019s rating to <\/span><i><span style=\"font-weight: 400;\">BBB<\/span><\/i><span style=\"font-weight: 400;\">, praising the RBI\u2019s strong record in inflation management.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Stable inflation within the 2\u20136% range has been crucial for investor confidence, growth prospects, and currency stability.<\/span><\/li>\n<\/ul>\n<h3><b>Background<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India adopted the <\/span><b>flexible inflation targeting framework<\/b><span style=\"font-weight: 400;\"> in 2016, with a medium-term CPI target of 4% and a tolerance band of 2\u20136%.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The present target is valid till <\/span><b>March 2026<\/b><span style=\"font-weight: 400;\">, after which it must be reset for the next five years.<\/span><\/li>\n<\/ul>\n<h2><b>Headline vs. Core Inflation in Monetary Policy<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><b>Economic Survey 2023-24<\/b><span style=\"font-weight: 400;\"> suggested that India\u2019s inflation targeting framework should consider focusing on <\/span><b>core inflation<\/b><span style=\"font-weight: 400;\"> (excluding food and fuel).<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Core inflation<\/b><span style=\"font-weight: 400;\"> &#8211; A measure of inflation that excludes highly volatile components, typically food and energy prices.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Headline inflation<\/b><span style=\"font-weight: 400;\"> &#8211; The total inflation rate in an economy, encompassing the prices of all goods and services within the representative basket.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This was due to the fact that the food prices in India often rise due to <\/span><b>supply shocks<\/b><span style=\"font-weight: 400;\"> rather than demand pressures\u2014making them less responsive to monetary policy tools.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI, under former Governor Shaktikanta Das, rejected this idea, stressing that <\/span><b>food prices cannot be ignored<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In its latest discussion paper, the RBI reiterated that nearly all inflation-targeting countries, regardless of their development stage, target <\/span><b>headline CPI inflation<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Uganda is the only exception, focusing on core inflation.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><b>Spillover Effects of Food Prices<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI highlighted that <\/span><b>persistent food inflation<\/b><span style=\"font-weight: 400;\"> eventually spills over into <\/span><b>core inflation<\/b><span style=\"font-weight: 400;\"> through higher wages, rents, and business markups.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Empirical evidence from India shows that while core prices remain stable, <\/span><span style=\"font-weight: 400;\">non-core (food and fuel) prices tend to converge with them over the long run<\/span><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Hence, ignoring food inflation could weaken monetary policy effectiveness.<\/span><\/li>\n<\/ul>\n<h2><b>Recent Trends<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In July 2024, <\/span><b>headline CPI inflation fell to 1.55%<\/b><span style=\"font-weight: 400;\">, an eight-year low, while <\/span><b>core inflation<\/b><span style=\"font-weight: 400;\"> stood at 4.1%.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Historically, headline inflation has fluctuated widely between <\/span><b>1.5% and 8.6%<\/b><span style=\"font-weight: 400;\"> since 2014 due to food price swings, whereas <\/span><b>core inflation has been more stable<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI concluded that monetary policy must ensure both <\/span><b>credibility and certainty<\/b><span style=\"font-weight: 400;\">, especially during global uncertainty.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Therefore, it emphasised the importance of continuing with <\/span><b>headline CPI as the target<\/b><span style=\"font-weight: 400;\">, since it better reflects the inflation experienced by households and investors.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <a href=\"https:\/\/indianexpress.com\/article\/business\/rbi-paper-monetary-policy-inflation-target-10203391\/\" target=\"_blank\" rel=\"nofollow noopener\"><span style=\"font-weight: 400;\">IE<\/span><\/a><span style=\"font-weight: 400;\"> | <\/span><a href=\"https:\/\/www.business-standard.com\/economy\/news\/rbi-reviews-inflation-targeting-framework-core-vs-headline-125082101509_1.html\" target=\"_blank\" rel=\"nofollow noopener\"><span style=\"font-weight: 400;\">BS<\/span><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>RBI warns that raising the 4% inflation target could undermine credibility, risking policy gains; seeks feedback on headline vs. core inflation and target range.<\/p>\n","protected":false},"author":18,"featured_media":60405,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[60,2299,22,59],"class_list":{"0":"post-60396","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-mains-articles","9":"tag-rbi-inflation-target","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/60396","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=60396"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/60396\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/60405"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=60396"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=60396"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=60396"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}