RBI Paper predicts to maintaining 4% Inflation appropriate for India

• Recommendation holds significance as it is reported that the government is considering recommending a looser inflation target for RBI, allowing it to focus more on economic growth despite price pressures.

• Inflation is good when it is mild. When prices are going up, people want to buy now rather than pay more later. This increases demand in the short term. As a result, stores sell more and factories produce more now.

Key findings:

• A steady decline in trend inflation to 4.1- 4.3% since 2014.

• Trend inflation provides a centering point for the evaluation of inflation forecasts over various time periods.

• It serves the crucial purpose of a consistency check on the setting of inflation targets.

• Paper notes that estimating trend inflation with regular updates is important for the formulation of monetary policy, irrespective of the country setting.

• Decline in the inflation persistence, indicating that households and businesses in India are becoming more forward-looking than before as credibility associated with monetary policy increases.

• Persistance is usually seen as referring to the duration of shocks hitting inflation.


Mains Paper 3: Economy

Prelims level: Inflation

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