INFLATION TARGETING AND RESERVE BANK OF INDIA

 Inflation or rise in general price level has been a major concern mainly for the poor and fixed income group over the years. Inflation has been caused by the cost push factors or increase in the cost various inputs of production and demand pull factors where the demand for products increases due to incrase in income change in consumption patterns etc.In order to minimize the impact of inflation on people  various measures have been adopted from time to time including monetary policy targeting mainly interest rates ,fiscal policies including subsidies, tax incentives and  rationing or provision of subsidied food through fair price  shops or other beneficiary transfer schemes. It has been observed that historically the  annual inflation rate in India averaged 7.37% between 1960to 2023 but reaching a historic high of 28.60% in 1974 and a all time low of-7.63% in1976.According to Ministry of Statistics and Program Implementation (MOSP) consumer price index CPI in India  averaged 137.26 points from 2011 to reaching an all time high of 192.90 points in July 2024 and a record low of 86.81 points in February 2011.

CHistory of inflation targeting in India dates back to 2014 when an expert Panel recommended its introduction. Accordingly in 2015 Reserve Bank of India and the Union Government agreed on a policy framework by amending RBI Act 1934 to provide legal basis for the new framework. In May 2016 the flexible inflation targeting (FIT) framework was adopted and formally established an in inflation target of 4% with a tolerance band of +/- 2%. The inflation target is based on the all -India  consumer price Index (CPI) compiled by the Central Statistical Office (CSO).The amended Act also provides for the Government to set the inflation target every five years in consultation with RBI.In India.While the consumer price index (CPI)  measures the average price level of goods and services purchased by households, the Whole Sale Price Index (WPI) on the  otherhand measures the average price level of goods sold in Whole sale market. The consumer price index is treated as headline inflation which  is a measure of total inflation in the economy inclusive of prices of food and which are more volatile causing inflationary spikes ,On the other hand   core inflation is calculated by excluding volatile components of food and energy prices from both consumer price index and wholesale price index .While CPI analyzes 260 items with more wheightage to food items WPI analyzed Whole sale inflation of 697 items. 

Inflation targeting is very vital as otherwise it may adversely affect different social groups including marginalised sections of the society. Inflation in turn is impacted by supply chain disruptions especially in edible oil , petroleum prices and high volatility in  food prices largely depending on climate change and geopolitical factors. Monetary policy Committee and RBI decided to retain its policy rates unchanged continously on the  basis of prevailing economic conditions and evolving macro economic developments. Since the RBI policy remained stubborn on inflation control the policy is termed as more or less hawkish in nature. Despite the majority opinion few members of Monetary Policy Committee advocated in favour of low interest rate or Dovish policy that would stimulate economic activities in the country. Even after adhering to the strict policy rates it is  disturbing to observe that RBI has failed to achieve the target of retail inflation at 4 % for the last five  years. 

Economic Survey 2024 raised the case to removal of a food prices from inflation targeting. In Indian economy the share of food in household expenditure is close to half of total household consumption expenditure.According to Economic Survey trends in core inflation are important in determining the contours of monetary policy. Addressing the emerging pattern of price rise pressures the RBI increased the repo rate gradually by 250 points since May 2022 to control Inflation. Current repo rate (the interest rate at which RBI lend money to commercial banks )Is at 6.5% unchanged since 8th February 2023 ,as against the reverse repo rate (rate at which RBI borrow funds from commercial banks) at 3.35%. Now it seems the plan is to adopt a Dovish monetary policy  so as to make the rates more flexible. Taking food inflation out of inflation targeting without any plan or scheme for  beneficiary transfers are  bound to be counterproductive. We have to be firm in dealing  with unemployment, poverty reduction and inflation targeting with well chalked out plans and projects. Any attempt to dilute them by changing the definition or diluting the variables either by redefining or deleting the existing components of poverty or inflation are unfair. Let us hope that better and  more inclusive sense will prevail among the policymakers.

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