Inflation Targeting

How does India measure retail inflation?

Inflation refers to a rise in the general level of prices of a set of goods and services over a period of time.
India bases its retail inflation metrics on the Consumer Price Index – Combined (CPI-C).

About CPI

Consumer Price Index-Combined (CPI-C) is an index which measures the weighted average of prices of a basket of consumer goods and services such as transportation, food and medical care.
It is calculated by measuring price changes for each item in the predetermined basket of goods and services and averaging them.
It is released by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation.
The base year used to calculate CPI-C in India is 2012.
Weightage of Sub-groups in CPI
- Food and beverages (45.86 percent of total weight);
- Miscellaneous (28.32 percent), of which Transport and communication (8.59 percent), health (5.89 percent), and education (4.46 percent);
- Housing (10.07 percent);
- Fuel and light (6.84 percent);
- Clothing and footwear (6.53 percent);
- Pan, tobacco and intoxicants (2.38 percent).

RBI’s Target

The RBI’s explicit mandate is to conduct monetary policy. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
In 2016, the Reserve Bank of India Act, 1934, was amended to provide a statutory basis for the implementation of a flexible inflation-targeting framework, where the Centre and the RBI would review and agree upon a specific inflation target every five years.
In 2021, the Centre decided to retain the inflation target of 4% (measured by CPI-C), with a tolerance band of +/- 2 percentage points for the period April 1, 2021, to March 31, 2026.
When the Reserve Bank of India fails to meet the inflation target, it will send a report to the central government stating reasons and remedial actions that will be taken. A breach of the “tolerance level” for three consecutive quarters will constitute a failure of monetary policy.

Why in News?

A new research paper has concluded that RBI’s inflation targeting regime has worked well and need not be abandoned in favour of a more discretionary regime that could be risky and counterproductive.
The paper is authored by economists Barry Eichengreen (University of California, Berkeley) and Poonam Gupta (NCAER).
The paper titled ‘Inflation Targeting In India: A Further Assessment’ said the weight of food-price inflation in the CPI inflation basket should be reduced to better reflect the circumstances of Indian households.

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