The flexible inflation targeting monetary policy regime has been successful in leashing the inflation rate within a range along with providing a favourable environment for economic growth, the finance ministry said, explaining its decision to stick to the same ‘tried and tested’ model.
The government last week retained the 4% inflation target with upper and lower tolerance bounds of 6% and 2% respectively, adopted first in 2016, for the five-year period from April 2021 to March 2026. While the repo rate dipped from 6.5% in October 2016 to 4% by March 2021, headline inflation averaged 3.9% during this period compared with 7.5% during 2013-16, the ministry pointed out.
The flexible inflation targeting led to a decline in price fluctuations, halved the volatility of core inflation, and moderated the median inflation expectations of urban households over a one-year ahead horizon. Volatility in interest rate and exchange rate also decreased during 2017-20, the ministry said in its monthly economic report for March.
“Until the pre-COVID period, there was only one occasion [Q4 of 2019-20] when inflation exceeded the upper tolerance level,” the ministry said. “The breach was due to a sharp spike in food inflation [9.7%] on a combination of adverse developments, i.e., the late withdrawal of the monsoon, unseasonal rains and associated supply disruptions,” the ministry added.
