March 20, 2023
  • Paper suggested that for some countries targeting leads to improved outcomes. However for most countries there is limited impact of such framework
  • Inflation targeting is a technique to bring inflation to a targeted level within a specific time horizon.
  • It controls inflation level by increasing or decreasing interest rate prevailing in economy.
    • Increasing rate is believed to bring down inflation by curtailing economic activity.
    • Decreasing rate increases inflation level by increasing economic activity.
  • Importance of Inflation Targeting
    • More transparent, accountable and coherent policymaking.
    • Price stability allows investors to confidently invest for productive activities.
    • Price stability maintains purchasing power of consumers.
  • In 2016, Parliament amended RBI Act, 1934 to change monetary policy, and introduce an inflation targeting framework.
  • As per the new framework. central government, in consultation with RBI sets:
    • An inflation target.
    • An upper and lower tolerance level for retail inflation.
  • Target has been set at 4%, with an upper tolerance limit of 6% and a lower tolerance limit of 2%.
    • Target and bands are revised every five years, In March 2021; the existing targets were carried forward.
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