Inflation must be RBI's priority with strict vigil, oversight assured | Current Affairs | Vision IAS

Daily News Summary

Get concise and efficient summaries of key articles from prominent newspapers. Our daily news digest ensures quick reading and easy understanding, helping you stay informed about important events and developments without spending hours going through full articles. Perfect for focused and timely updates.

News Summary

Sun Mon Tue Wed Thu Fri Sat

Inflation must be RBI's priority with strict vigil, oversight assured

2 min read

Review of RBI's Inflation-Targeting Framework

The Reserve Bank of India (RBI) is initiating a discussion paper to review its inflation-targeting framework, aiming for a second comprehensive review by March 2026. Unlike the previous review in 2021, this time public consultation is part of the process, although some argue that the government should have issued the paper as they hold the responsibility under the RBI Act.

Headline vs. Core Inflation Targeting

  • Experts generally support targeting headline inflation with adjusted weightings in the consumer price index (CPI).
  • There is significant support for maintaining the current framework.

RBI's Multifaceted Role

The RBI handles multiple roles that can sometimes conflict, making it challenging to establish clear key performance indicators (KPIs). The 2016 amendment to the RBI Act sought to focus the RBI on inflation control, accountability, and transparency in repo rate decisions.

Monetary Policy Committee's (MPC) Performance

  • The MPC has been effective, regularly explaining its decisions and publishing detailed meeting minutes.
  • There is an ongoing debate on balancing price stability and economic growth.

Price Stability vs. Economic Growth

Price stability is prioritized due to its profound impact on poorer populations and the unorganized sectors. While fiscal policy is crucial, coordination with monetary policy is necessary for optimal outcomes.

RBI's Statutory Mandate and Flexibility

  • Discussion paper questions: 
    1. Adjusting the tolerance band of (+/-) 2 per cent.
    2. Considering a flexible range instead of a point target of 4 per cent.
  • The current band may need narrowing in 2026 to maintain focus on inflation control.

Challenges in Inflation Control

Since the 2016 Act amendment, maintaining inflation below 6 per cent has been problematic, especially between December 2019 and August 2023. The RBI attributed some inflation rises to supply-side constraints, highlighting the limitations of monetary policy alone in such cases.

Section 45ZN of the RBI Act, 1934

  • Mandates RBI to report to the government if inflation exceeds 6 per cent over three quarters.
  • The report should explain the failure, propose remedies, and estimate the time to achieve targets.
  • In November 2022, RBI submitted such a report, but its contents and governmental actions remain undisclosed.

Transparency and Accountability

The government has not made the RBI's report public, citing the RBI Act's lack of provisions. However, increased transparency, such as parliamentary reviews of the report, could enhance oversight.

Conclusion

The RBI should maintain a vigilant stance on inflation with parliamentary oversight ensuring accountability. Transparency in handling reports could further enhance public trust and policy effectiveness.

  • Tags :
  • Inflation
  • Headline Inflation
  • Core Inflation
  • Inflation-Targeting Framework
Subscribe for Premium Features

Quick Start

Use our Quick Start guide to learn about everything this platform can do for you.
Get Started