The upside risks to CPI headline inflation have declined under the flexible inflation targeting framework, according to a working paper released by the Reserve Bank of India (RBI).
“In the FIT period, upside risks to CPI headline inflation have declined to a level of 6.5% from a double-digit level preceding it and have remained stable,” the paper said.
The study also shows that an increase in household inflation expectations, domestic real GDP growth and global non-fuel price inflation uniformly lead to the higher upside risks to inflation. During extreme events such as global financial crisis and pandemic, tracking inflation trajectory becomes difficult and in such times the distribution of future inflation, in addition to the inflation forecast, aids future guidance, particularly under a flexible inflation targeting framework, the paper said.
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India adopted the flexible IT framework in 2016, which was reviewed in March 2021, and the inflation target of 4% with a upper and lower tolerance band of 2% was continued until the next review in 2026. From FY12 to FY14, the average CPI inflation rate stood at 9.4%, which moderated gradually towards the midpoint of the target. Notably, CPI inflation averaged 3.9% from October 2016 to March 2020.