The present inflation target of 2 to 6 per cent is appropriate for the next five years to ensure price stability, the Reserve Bank of India (RBI) said on Friday.
"Threshold inflation above which growth is unambiguously impaired ranges between 5 and 6 per cent in India, indicating that an inflation rate of 6 per cent is the appropriate upper tolerance limit for the inflation target," the RBI said in the report on currency and finance.
A lower bound of above 2 per cent can lead to actual inflation frequently dipping below the tolerance band while a lower bound below 2 per cent will hamper growth, indicating that an inflation rate of 2 per cent is the appropriate lower tolerance bound.
"Hence, the current numerical framework for defining price stability, that is an inflation target of 4 per cent with a plus/minus 2 per cent tolerance band is appropriate for the next five years," the report said.
This is also consistent with estimates of supply shocks, it said. On the upper tolerance limit, international experience suggests that countries with a large share of food in the CPI basket tend to have higher inflation targets and wider tolerance bands.
Threshold estimates over a longer sample period work out to 6 per cent, beyond which tolerance of inflation can be harmful to growth, the report said.
"Hence, the current tolerance band of plus/minus 2 per cent may be retained, notwithstanding the central tendency emerging from the country experience of lowering targets and narrowing bands over time," said the report.
( With inputs from ANI )
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