Inflation of an economy is the key factor when the monetary policy is being evaluated. India adopted the flexible inflation targeting (FIT) regime in 2016 and according to Crisil, this has been a good decision taken by the economy. The FIT has helped India maintain its price stability.
FIT is a monetary policy strategy to maintain price stability, by making sure the price level is within a certain range. It is a type of inflation targeting. Inflation targeting is an economic concept used by countries when a change in the monetary policy is required, to bring more predictability, stability, and transparency in the policy.
On June 27, 2016, the Reserve Bank of India (RBI) shifted to a flexible inflation targeting (FIT) regime to keep the price volatility in check. Since the FIT regime, the target for CPI has been four percent, with an approximation of two percent (± 2%). FIT largely takes to account the Consumer Price Inflation (CPI) as the yardstick to check the economy's inflation.
The consumer inflation fell to 3.9 percent on average in three years after implementation, from an average of 7.3 percent in the four years preceding to the year of implementation, the Crisil report found, adding that 'the phenomenon was visible not only headline inflation but also in each of its key categories'.
In April, CPI rose to 2.92 percent as against 2.86 percent in March. The rise was largely due to the increase in vegetable prices. However, despite this slight surge, inflation has remained fairly stable.
Monetary policy uses policy rates — repo and reverse repo rates — to keep the inflation in check and since inflation and price are dynamic in nature, it is essential for the country to have periodical monetary policy meetings.
The key objective of inflation targeting is to ensure that inflation remains neutral to volatility in the economy, prices, among other factors and expectations.
A rise in the prices create uncertainties and in turn, affect savings and investments of the economy. Keeping this in mind, many economies have adopted inflation targeting.
The Reserve Bank of India (RBI) will announce the outcome of its second bi-monthly monetary policy meeting of the financial year on June 6, where many analysts and reports have predicted a cut in the policy rates.