The Reserve Bank of India (RBI) has said that the flexible inflation targeting (FIT) framework has performed well since its introduction, meeting the needs of the country even during challenging times.
In a recent report, the RBI highlighted that the FIT framework, introduced to maintain price stability in India, has broadly delivered on its objectives. Between its inception and the end of 2019, inflation in India remained low and stable, averaging around 4 per cent.
The report stated, “The experience of the FIT framework, introduced in 2016 and first reviewed in 2021, has broadly performed well.”
However, the RBI noted that monetary policy became more challenging in later years due to repeated shocks to food and fuel prices. These shocks were particularly pronounced during the post-pandemic phase and the Russia-Ukraine conflict, which pushed inflation beyond the target range—a trend observed in many other economies as well.
India’s inflation-targeting experience is unique because over half of the consumption basket consists of food and energy items. Supply-side shocks to these essential goods posed greater challenges for stabilising inflation than in other countries adopting inflation targeting. The RBI said this makes India’s experience important and full of lessons for nations facing similar vulnerabilities.
The report further observed that India’s price stability has resulted from effective coordination between the government and the central bank. While the RBI implemented monetary tightening measures to prevent second-round effects of rising prices, the government undertook supply-side interventions to ensure the smooth availability of essential goods. This monetary-fiscal coordination, the RBI noted, has been key to the success of the FIT framework.
The central bank also highlighted that the credibility and flexibility embedded in the framework have helped India navigate global difficulties. It suggested that the framework could serve as a useful template for other countries vulnerable to inflationary pressures arising from supply shocks.
-ANI
