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View: India’s inflation targeting framework ain’t broke. But it can definitely do with some improvement

View: India’s inflation targeting framework ain’t broke. But it can definitely do with some improvement
View: India’s inflation targeting framework ain’t broke. But it can definitely do with some improvement
While the shift in monetary policy focus to CPI from WPI has been a welcome development, the current framework has led to excessive emphasis on point CPI estimates at the cost of ignoring other indicators.

Synopsis

The consumer price index (CPI) inflation mid-point target should be maintained at 4% within a +/-2% band, but a blended core inflation — average of CPI and wholesale price index (WPI) — target of 4% +/-1% should be added as an additional anchor to decide on the monetary policy stance. If both headline CPI inflation and core inflation remain above 5% on a secular basis, then the central bank will need to tighten monetary stance, to bring inflation back to the target.

Based on India’s long-term inflation trend — before and after the formal adoption of a flexible inflation targeting framework in August 2016 — changes should be made to the current flexible inflation targeting framework to make it more consistent with the economic realities on the ground.The consumer price index (CPI) inflation mid-point target should be maintained at 4% within a +/-2% band, but a blended core inflation — average of CPI and
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