RBI Wades into Headline vs Core Inflation Debate

The central bank has initiated a process to gather opinions on whether monetary policy should track headline inflation or core inflation, which strips out the impact of fuel and energy price increases.

- Shayan Ghosh

The Reserve Bank of India (RBI) on Thursday released a discussion paper on its inflation-targeting framework—seven months before the existing one comes up for renewal. The framework is reviewed every five years, with the last one happening in 2021, when the government, in consultation with RBI, set it at 4% with a tolerance band of +/-2%.

The discussion paper asks four questions. First, whether headline inflation or core inflation would best guide the conduct of monetary policy, given evolving relative dynamics of food and core inflation and the continuing high weight of food in the consumer price basket. Second, whether the 4% inflation target continues to remain optimal for balancing growth with stability in a fast-growing, large emerging economy like India.

Third, should the tolerance band around the target be revised in any way, including whether it should be narrowed, widened, or eliminated? Lastly, should the target inflation level be removed, and only a range be maintained within the overall ambit of maintaining flexibility without undermining monetary policy's credibility?