New Delhi: The Reserve Bank of India's (RBI) inflation targeting system has worked well and there is no need to abandon it in favour of a more discretionary system, a new research paper says. According to the research paper, if the RBI abandons the inflation targeting system, it could prove to be risky and counterproductive.

The paper, titled 'Inflation Targeting in India: A Further Assessment', said that the weight of food price inflation in CPI inflation should be reduced to better reflect the circumstances of Indian households. It said, "The RBI's inflation targeting system has worked well. Hence, changes such as broadening it or abandoning the target in favour of a more discretionary system would be risky and counterproductive."

4% inflation target is appropriate

The authors of this research paper are economists Barry Eichengreen (University of California, Berkeley) and Poonam Gupta (NCAER). It further said that the target of four percent inflation with a variation of two percent is broadly justified. The research paper says that the agreement between the RBI and the government regarding the inflation target has performed as expected in almost all cases.

The letter said that this has happened only once that inflation has remained above the upper tolerable limit of six per cent for three consecutive quarters (during January 2022-September 2022).

Advocacy for keeping food inflation out

Recently, Chief Economic Advisor (CEA) V Anantha Nageshwaran had advocated keeping food inflation out while deciding the policy interest rate. He had said that monetary policy has no effect on the prices of food items and its prices are largely determined according to the supply side. Let us tell you that the government has given the target to RBI to keep inflation at four percent with a variation of two percent.