India likely to retain 4% inflation target for central bank, Bloomberg News reports

India's anticipated decision to retain its 4% inflation target for the Reserve Bank of India (RBI), operating within a flexible band of 2% to 6%, marks a significant affirmation of its current monetary policy framework. This approach, adopted in 2016, is not merely a technical adjustment but a cornerstone of India's macroeconomic stability strategy, deeply impacting its economic trajectory, public welfare, and global financial standing. Understanding this framework is crucial for any competitive exam aspirant.

**Background Context and Historical Evolution:**

Prior to 2016, India's monetary policy framework was often described as a 'multiple indicator approach,' where the RBI considered various factors like inflation, growth, exchange rates, and financial stability. While seemingly comprehensive, this approach was frequently criticized for lacking clarity, accountability, and a definitive anchor for monetary policy. The absence of a single, overriding objective sometimes led to policy paralysis or conflicting signals. The global financial crisis of 2008 and subsequent economic volatility highlighted the need for a more predictable and transparent framework.

The genesis of flexible inflation targeting (FIT) in India can be traced back to the recommendations of the **Urjit Patel Committee Report** (Expert Committee to Revise and Strengthen the Monetary Policy Framework), submitted in January 2014. This committee strongly advocated for a shift towards a single objective of price stability, defined as controlling inflation, with a target of 4% (+/- 2%). The rationale was that maintaining price stability is a prerequisite for sustainable growth and ensures the long-term welfare of citizens, particularly the poor who are most vulnerable to inflation's erosive effects.

**What Happened and Key Stakeholders:**

Based on these recommendations, the Government of India and the Reserve Bank of India formally entered into a **Monetary Policy Framework Agreement** in February 2015. This agreement outlined the primary objective of monetary policy as maintaining price stability while keeping in mind the objective of growth. Subsequently, the **Reserve Bank of India Act, 1934**, was amended in 2016 to provide a statutory basis for the flexible inflation targeting framework. Specifically, **Section 45ZA** of the amended RBI Act empowers the central government, in consultation with the RBI, to set the inflation target. The government then notified the 4% Consumer Price Index (CPI) inflation target with a tolerance band of +/- 2% (i.e., 2% to 6%) for a five-year period, which is now due for renewal in March. The news reports indicate a strong likelihood of retaining this target, signaling satisfaction with its effectiveness.

The key stakeholders involved are:

1. **Reserve Bank of India (RBI):** The primary implementer of monetary policy. Its **Monetary Policy Committee (MPC)**, constituted under **Section 45ZB** of the RBI Act, is a six-member body (three from RBI, three appointed by the government) responsible for determining the policy interest rate (repo rate) required to achieve the inflation target. The MPC's decisions are taken by majority vote, with the RBI Governor having a casting vote in case of a tie.

2. **Government of India (Ministry of Finance):** Sets the inflation target in consultation with the RBI and plays a crucial role in fiscal policy, which interacts with monetary policy.

3. **Indian Public and Businesses:** Directly impacted by inflation (cost of living, purchasing power) and interest rates (borrowing costs, investment decisions). Stable inflation provides predictability for economic planning.

**Significance for India and Future Implications:**

Retaining the 4% inflation target underscores India's commitment to price stability, which is vital for several reasons. Firstly, it provides a clear anchor for monetary policy, enhancing transparency and accountability of the RBI. This clarity helps manage inflation expectations among the public and businesses. Secondly, stable inflation fosters a conducive environment for investment and economic growth by reducing uncertainty and encouraging long-term planning. High and volatile inflation erodes purchasing power, particularly for fixed-income earners and the poor, and discourages savings and investment.

Historically, India has grappled with high inflation, particularly food inflation, which has often been politically sensitive. The FIT framework has largely succeeded in keeping CPI inflation within the 2-6% band for most of the past decade, despite significant domestic and global shocks like the COVID-19 pandemic and geopolitical conflicts. This success has bolstered the credibility of the RBI and its monetary policy.

Looking ahead, the retention of the target suggests a continuation of a predictable monetary policy stance. However, future challenges remain. Balancing the inflation target with the imperative for economic growth, especially in a developing economy like India, is a perpetual tightrope walk. Global commodity price shocks, supply chain disruptions, and domestic demand pressures will continue to test the framework's resilience. The MPC will need to remain agile, using its policy tools effectively to navigate these complexities. This stable framework also sends a positive signal to international investors about India's commitment to sound macroeconomic management.

**Related Constitutional Articles, Acts, or Policies:**

* **Reserve Bank of India Act, 1934**: The foundational act for the RBI. Amended in 2016 to establish the Monetary Policy Committee (MPC) and formalize inflation targeting. Key sections include **Section 45ZA** (power to determine inflation target), **Section 45ZB** (constitution of MPC), and **Section 45ZC** (MPC's functions).

* **Monetary Policy Framework Agreement (2015):** An agreement between the Government of India and the RBI that set the operational framework for inflation targeting prior to the statutory amendment.

* **Article 282 (Financial Emergency) / Article 360 (Financial Emergency):** While not directly related to inflation targeting, these articles highlight the government's role in financial stability, which is indirectly supported by sound monetary policy. However, the direct legal basis for inflation targeting is the RBI Act.

* **Fiscal Policy:** The government's expenditure and taxation policies significantly influence aggregate demand and inflation. The coordination between fiscal and monetary policy is crucial for overall macroeconomic stability.