Not too long ago, a governor of the Reserve Bank of India (RBI) said that his main job was to protect the value of your money. That has always been the central bank's primary function. In 2016, it was codified, with explicit inflation targeting given primacy by amending the RBI Act of 1934. India was following the herd of central banks that had joined the ranks of inflation targeters, a trend that started in the 1990s. In this policy framework, called flexible inflation targeting, RBI had a mandate and a numerical target of an inflation band given by the government. This was formalized as a contract between RBI and the government, with the former to be held accountable in case of deviation. RBI also had an implicit dual mandate: high growth had to be sustained too, but price stability had primacy. This was reiterated in a 2021 review of this framework.
But lately, there have been noises on two fronts. Does an exclusive mandate of inflation targeting make sense? And should not the numerical target of inflation exclude food and fuel items since their prices are volatile and beyond the control of RBI actions?
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