RBI Should Not Abandon Headline Inflation as Its Target

A Shift to Core Inflation Could Injure RBI's Credibility and Get in the Way of a Regime That's Working Well

- AJIT RANADE

The Reserve Bank of India (RBI) has invited comments from stakeholders on a discussion paper on the next five-yearly review of its monetary policy framework. This framework, called India's flexible inflation targeting (FIT) regime, was adopted in 2016. It was a landmark reform that established price stability as the primary goal of monetary policy. It was formalized through a contract signed between the government and the central bank which set a Consumer Price Index (CPI) inflation target of 4%, the mid-point of a tolerance band of 2-6%, and gave RBI a statutory mandate by changing the RBI Act. This institutionalized transparency and accountability aligned India's approach with global best practices. It was reaffirmed in 2021.

RBI is now weighing the idea of switching to a core inflation target. That would be a mistake. The current framework remains optimal for India in both the international and domestic contexts.