‘Inflation Targeting’ Neither Necessary, Nor Sufficient For Price Control: IMF Paper.

January 24, 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.