Inflation Targeting is the central bank’s monetary policy strategy to keep inflation within a target range by adjusting interest rates or inflation-targeting instruments.
Inflation Targeting in India
- In India, on the recommendations of the Urjit Patel Committee, inflation targeting was adopted in February 2015 after the Agreement on Monetary Policy Framework was signed between the GoI and the RBI.
- The aim of inflation targeting is to ensure price stability.
- If inflation in the economy appears to be higher than the upper target, it tries to increase the interest rates to bring prices down.
- If inflation in the economy appears to be lower than the lower target, it tries to reduce the interest rates to bring prices up.
Agreement on Monetary Policy Framework
- The RBI will aim to ensure the CPI-C Inflation every year shall be 4 per cent with a band of +/– 2 per cent. (Between 2-6%)
- RBI shall publish the Operating Target(s) and establish an Operating Procedure of monetary policy to achieve the target.
- If the RBI fails to meet the target it shall report to the GoI:
- the reasons for its failure to achieve the target under set in this agreement;
- remedial actions proposed to be taken by the RBI; and
- an estimate of the time period within which the target would be achieved pursuant to the timely implementation of proposed remedial actions.
- If any dispute arises regarding the interpretation or implementation of the agreement, it shall be resolved between the Governor, RBI and the GoI.
India joined the club of inflation targeting countries such as Brazil, China, the European Union, Indonesia, Japan, South Korea, the UK and the USA. It was New Zealand that implemented inflation targeting for the first time in the world in 1989.
What Is Inflation?
The simple definition of inflation is the sustained upward movement in the overall price level of goods and services in the economy. It has the effect of devaluing a particular currency.
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