Current inflation target appropriate for next 5 years: RBI report

The country adopted the FIT framework in 2016, and the next review of the inflation target is due before March 31, 2021

Mumbai: With the next review of the flexible inflation target (FIT) framework coming up soon, the Reserve Bank of India (RBI) on Friday said the current inflation target of 4 per cent with a +/-2 per cent tolerance band is appropriate for the next five years.

The country adopted the FIT framework in 2016, and the next review of the inflation target is due before March 31, 2021.

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“The current numerical framework for defining price stability, i.e., an inflation target of 4 per cent with a +/-2 per cent tolerance band, is appropriate for the next five years,” the RBI said in the Report on Currency and Finance (RCF) for the year 2020-21.

The RBI said the period of study in this report is from October 2016 to March 2020 commencing with the formal operationalisation of the FIT framework in the country but excluding the period of the COVID-19 pandemic in view of data distortions.

The report said trend inflation has fallen from above nine per cent before FIT to a range of 3.8-4.3 per cent during FIT, indicating that 4 per cent is the appropriate level of the inflation target for the country, it said.

The report said an inflation rate of 6 per cent is the appropriate upper tolerance limit for the inflation target.

Retail payments

The RBI on Friday extended the deadline to apply for an umbrella entity, which the central bank wants to set up to focus on retail payments system in the country, by over a month to March 31 in view of the pandemic.

In August last year, RBI had released a framework for authorisation of an umbrella entity for retail payments in the country and had invited applications from desirous entities by February 26, 2021. Requests have been received from various stakeholders including Indian Banks’ Association for extending the deadline, keeping in view the COVID-19 related disruptions and inconveniences, RBI said.