Reserve Bank of India (RBI) has release in an internal report on Currency and Finance (RCF) for the year 2020-21. It states that the India’s medium-term inflation target of 4 per cent is appropriate for the country under its Flexible Inflation Targeting (FIT) mandate.
As per the report, the current numerical framework for defining price stability, i.e., an inflation target of 4 per cent with a +/-2 per cent tolerance band, is appropriate for the next five years.
However, trend inflation to which actual inflation converges after a shock provides an appropriate benchmark for the inflation target, trend inflation has fallen from above 9 per cent before FIT to a range of 3.8 – 4.3 per cent during FIT.
The report further added, in the conduct of monetary policy in an open economy setting, foreign exchange reserves and associated liquidity management are crucial and hence, there is a need to enhance the RBI’s sterilisation capacity to deal with surges in capital flows.
The primary focus of flexible inflation targeting on price stability augurs well for further liberalisation of the capital account and eventual internationalisation of the Indian rupee.
India adopted the flexible inflation targeting framework in 2016 and the government is due to review the same in the near future.
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