Inflation must be RBI's priority

A wide tolerance band and flexible targets risk diluting the central bank's mandate

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The Reserve Bank of India (RBI) has done well to initiate a discussion paper to review its inflation-targeting framework, seeking feedback on key aspects ahead of the mandatory second five-year review in March 2026. Notably, no such public consultation was held during the first five-year review in 2021. That said, the discussion paper should have been issued by the government, as the responsibility for resetting the target lies with the government under the RBI Act.

Many experts and economists have since expressed their views on different aspects of the discussion paper. On the issue of headline versus core inflation targeting, there is much commentary, including a poll by this newspaper, favouring the headline inflation target, with an appropriate tweaking of the weightings of different constituents of the consumer price index (CPI) basket. On the other issues too, the majority view seems to favour maintaining the status quo.

The RBI performs multifarious functions, some of which are, in fact, conflicting. It isn't easy to spell out the KPIs (key performance indicators) to judge its performance objectively. The objective of amending the RBI Act in 2016 was to make the RBI focus on containing inflation, make it accountable for achieving this objective, and bring in transparency in deciding the repo rate.

The framework has worked reasonably well, with the Monetary Policy Committee (MPC) doing a decent job. After each MPC meeting, the RBI has been eloquent in explaining its position, besides making inflation and growth projections. The minutes of MPC proceedings, giving views expressed by each of the members, are published a fortnight after each meeting.