The Reserve Bank of India (RBI) is in the favour of retaining the current inflation target of 2-6% for the next five years as consumers still have expectations of elevated inflation. The central bank's statement comes ahead of an upcoming review from the government on the existing target that was set in 2016.
"The international experience suggests that inflation-targeting emerging market economies have either lowered their inflation targets or kept their targets unchanged over time. In India, however, the repetitive incidence of supply shocks, still elevated inflation expectations and projection errors necessitate persevering with the current numerical framework for the target and tolerance band for inflation for the next five years," the RBI said in its report on currency and finance On Friday.
"It is important to recognise that while setting a single target/tolerance band for the next five years, structural changes that may materialise or the type of shocks that may hit the economy are difficult to anticipate fully. Hence, flexibility must be built into the framework, without undermining the discipline of the inflation target," RBI said.
The central bank adopted a flexible inflation targeting framework in 2016 under Urjit Patel, when it also shifted to the monetary policy committee (MPC) framework for deciding on interest rates. The inflation target are to be reviewed every five years as per the legislation.