The Reserve Bank of India (RBI) is aiming to further refine the building blocks of flexible inflation targeting (FIT) framework by making advances in the use of new data and developing more robust models, Governor Sanjay Malhotra said at his first post monetary policy committee (MPC) meeting statement today.
“We will strive to further refine the building blocks of this framework by making advances in the use of new data, improving nowcasting and forecasting of key macroeconomic variables and developing more robust models,” he said. Under the FIT framework, the RBI targets maintaining headline CPI inflation at 4 per cent, (+/-2) percent.
The governor said after being introduced in the 2016 and reviewed in 2021, FIT has has served the Indian economy well, including the challenging period since the pandemic. The average inflation has been lower post the introduction of FIT, he said.
Moreover, CPI inflation has mostly stayed aligned with the target, barring a few occasions of breaching the upper tolerance band since its inception. The RBI will continue to improve the macroeconomic outcomes in the best interest of the economy using the flexibility embedded in the framework while responding to the evolving growth-inflation dynamics, he said.
According to CareEdge Ratings Chief Economist Rajani Sinha, the governor has stressed on the ‘flexible’ aspect of the inflation targeting framework and improving forecasting models, plausibly signalling a more forward-looking approach towards the policy decisions. “This will also prepare the ground for rate cuts in the future. A further rate cut of 25-50 bps is expected in FY26, depending on how growth-inflation dynamics play out,” she said.