India's inflation target band appropriate for next 5 years - RBI report

By Swati Bhat

MUMBAI (Reuters) - India's current medium-term inflation target band is appropriate for the next five years, the Reserve Bank of India said in an internal report published on Friday.

The RBI seeks to keep inflation within a 2-6% range with a target of achieving 4% inflation over the medium term.

India's central bank adopted the flexible inflation targeting framework in 2016 to tackle high and volatile prices driven by fuel and food prices in Asia's third-largest economy. The target band has to be reviewed every five years, according to the law.

"The current numerical framework for defining price stability, i.e., an inflation target of 4% with a +/-2% tolerance band, is appropriate for the next five years," RBI said in the report, recommending the target be looked at periodically even when a review is not required by statute.

"It is important to recognise that while setting a single target/tolerance band for the next five years, structural changes that may materialise or the type of shocks that may hit the economy are difficult to anticipate fully."

Retail inflation in India returned towards RBI's 2%-6% target range in December. It remained stubbornly above the central bank's comfort range for eight consecutive months during the COVID-19 pandemic, as national lockdowns caused supply-side disruptions.

"Trend inflation to which actual inflation converges after a shock provides an appropriate benchmark for the inflation target," the RBI said explaining why it thinks 4% is an appropriate medium-term target.

India's inflation target band needs to be refined to reflect demand-side factors, Krishnamurthy Subramanian, chief economic adviser at the finance ministry had said earlier in the week.

(Reporting by Swati Bhat; Editing by Ana Nicolaci da Costa)