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India's Inflation target review: Lesson from the world

There are expectations government will continue with existing 4 per cent target with a 2 per cent band on either side for any short term slippages, change the target upward to support growth or change the benchmark itself from CPI to core inflation or wholesale price index (WPI)

twitter-logoAnand Adhikari | March 2, 2021 | Updated 18:41 IST
India's Inflation target review: Lesson from the world

Finance minister Nirmala Sitharaman has said that the consumer price index (CPI) or retail inflation target of 4 per cent with a band of 2 per cent to 6 per cent is up for review as the term of first five years of  MPC is ending in March this year. There are expectations government will continue with existing 4 per cent target with a 2 per cent band on either side for any short term slippages, change the target upward to support growth or change the benchmark itself from CPI to core inflation or wholesale price index (WPI). This is something many countries have done after launching the flexible inflation targeting regime. In fact, there are many countries that have tweaked the inflation targeting in the last 2-3 years. Let's take a look:

The US Federal Reserve has made a major shift to average inflation targeting. This would provide a leeway to Central Bank to tolerate even higher inflation in between as the objective would be to target the average rate. This has been done to support the economy as two big events --global financial crisis and the Covid outbreak-- have impacted growth.

In a span of a decade, Thailand has changed both the benchmark as well as the target. The more recent change in the inflation band was done just before the Covid outbreak. A decade ago, this South Asian country decided to adopt the globally accepted flexible inflation targeting regime with core inflation as a benchmark. This was changed to headline inflation in 2015 with targeted inflation of 2.5 per cent with a bank of 1.5 per cent on both sides. A year ago, Thailand lowered the headline inflation target to a range of 1.0 to 3.0 per cent for 2020 from the point target of 1 to 4 per cent.

Brazil has a two-decade experience with flexible inflation targeting regime. This Latin American country has consumer price index as benchmark. Brazil, which has a high dependence on exports and foreign inflows, saw central banking missing the targets in early years and also in 2015.  In fact, keeping higher interest rates to check inflationary pressure somehow didn't work for Brazil as currency depreciation has a larger impact on inflation. The other interesting feature of Brazil's inflation targeting regime is the one-year period as against 5-year mandate in India. Brazil has set an inflation target of 3.75 per cent in 2021 and 3.5 per cent in 2022. In the last five years, it has changed only the bank band, which reduced from 2 per cent to 1.5 per cent in 2017 period.

Indonesia Central Bank has seen a gradual decline in its inflation target from 4 per cent with a band of 1 per cent on either side in the 2015 period to 3 per cent in 2021. Over a period of time, they have reduced the target. 

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