RBI Must Keep Inflation Firmly in Its Crosshairs

Its call for feedback on its monetary policy framework is welcome. Overall, flexible inflation targeting has served India well so far. But every review is an opportunity to make it better

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The Reserve Bank of India's (RBI) discussion paper (DP) on its monetary policy framework, released last Thursday as part of a mandated five-yearly review, poses four key questions on which the central bank has sought feedback. First, should monetary policy target headline inflation, as presently mandated under the flexible inflation targeting (FIT) regime introduced in 2016, or core inflation (i.e., headline inflation stripped of volatile elements like food and fuel)? The answer to that is straightforward and RBI's DP also seems to veer towards that conclusion; namely, that for a country like India, where food constitutes a significant share of the consumption basket (close to 46%) for a large number, it is meaningless to target core instead of headline inflation. The food component's weight, in any case, is bound to decline once the Consumer Price Index is recast based on a more up-to-date Household Consumption Expenditure Survey for 2023-24, as against the 2011-12 data in use today. That exercise is already underway, so we can expect the