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What is inflation targeting?

What is inflation targeting?
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What is inflation targeting? The Central government and the RBI have agreed to set a consumer price index (CPI) inflation target of 4 per cent, with a...

The Central government and the RBI have agreed to set a consumer price index (CPI) inflation target of 4 per cent, with a band of plus or minus two percentage points, from the financial year ending in March 2017. This marks India’s formal adoption of inflation targeting, a historic monetary policy overhaul that marks a victory for Reserve Bank of India Governor Raguram Rajan, as the government makes subduing chronically volatile prices a priority. Rajan has been arguing for inflation targeting, which increasingly becoming a popular monetary tool in emerging market economies that are struggling to contain price rises that hurt their poorest citizens.

Retail inflation may fall to 5-5.5% in 2015-16 on cooling oil prices, weak global demand and increased farm production, providing relief to both the people and the government, according to the Economic Survey. This is lower than the Reserve Bank of India’s (RBI) estimate of 6% retail inflation by January next year. The survey, released a day ahead of finance minister Arun Jaitley’s first full budget, has forecast economic growth to rise to 8.1-8.5% under new calculations. The forecast marks an acceleration of growth from the 7.4% projected in 2014-15. “Consumer price inflation (CPI), which is likely to print at 6.5% for 2014-15, is likely to decline further. Our estimate for 2015-16 is for CPI inflation to be in 5-5.5% range and for the GDP (gross domestic product) deflator to be in the 2.8-3% range,” the survey said.

What is inflation targeting. It is a central banking policy that revolves around meeting preset, publicly displayed targets for the annual rate of inflation. The benchmark used for inflation targeting is typically a price index of a basket of consumer goods, such as the Consumer Price Index (CPI).

Along with inflation target rates and calendar dates to be used as performance measures, an inflation targeting policy may also have established steps that are to be taken depending on how much the actual inflation rate varies from the targeted level, such as cutting lending rates or adding liquidity to the economy.

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