The key advantage of setting a range (between 2 and 6 per cent) around a target is that it allows the Monetary Policy Committee (MPC) to recognise the short run trade-offs between inflation and growth but enables it to pursue the inflation target in long run over the course of business cycle, a finance ministry statement said.
The range also accommodates data limitations, projection errors, short-run supply gaps and instability in the agriculture production, an important factor for CPI inflation, as food articles have a major weight in the CPI indices.
It also allows accommodating unanticipated short-term shocks even while nudging public inflation expectations on the centre of the range, to which the monetary policy will return the economy over the medium term, leading to transparency and predictability.
Further, if the average inflation is more than the upper tolerance level of 4 per cent plus 2 per cent, that is, 6 per cent, or less than the lower tolerance level of 4 per cent minus 2 per cent, that is 2 per cent, for any three consecutive quarters, it would mean a failure to achieve the inflation target.
When RBI fails to meet the inflation target, in terms of the provisions of RBI Act, it shall set out a report to the Central Government stating the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by RBI; and an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions, the statement said. (RKS)
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