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Key Points

A new report by JM Financial recommends narrowing India's inflation tolerance band to improve policy effectiveness. The suggestion comes as RBI reviews its monetary policy framework through a public discussion paper. The report argues that a tighter band would strengthen policy credibility, similar to approaches in Asian peers like Indonesia. The central bank will make final decisions on any framework changes by April 2026 after gathering public feedback.

Key Points: JM Financial Report Recommends Narrowing India Inflation Band to 1.5%

  • Report suggests narrowing inflation band to 1-1.5% from current 2%
  • RBI reviewing monetary policy framework through discussion paper
  • Headline inflation remains more relevant than core for India
  • Final decision on framework changes expected by April 2026
2 min read

Inflation band in India can be narrowed to 1% - 1.5% from 2% to improve policy effectiveness: Report

JM Financial suggests reducing India's inflation tolerance band from 2% to 1-1.5% to enhance RBI monetary policy effectiveness and credibility.

"the target range can be narrowed further to 1 per cent -1.5 per cent as in the case of some of the Asian peers like Indonesia - JM Financial Report"

New Delhi, August 28

The current inflation band in India can be narrowed to 1 to 1.5 per cent compared to the existing 2 per cent to improve its effectiveness, according to a report by JM Financials.

Currently, the Reserve Bank of India's Monetary Policy Committee (MPC) follows a framework that targets inflation within the 2-6 per cent band, with 4 per cent as the midpoint.

The suggestion comes in the backdrop of the RBI releasing a discussion paper on reviewing the monetary policy framework.

The paper has assessed the progress of India's Flexible Inflation Targeting (FIT) framework since 2016. It looked at how the framework has helped reduce average inflation, improve policy credibility, and bring more transparency to policy-making.

The RBI paper broadly discusses four questions, whether the current 4 per cent inflation target continues to be appropriate, whether only a range should be maintained, whether headline or core inflation should be targeted, and finally, whether the tolerance band should be narrowed, widened, or even removed.

The report noted that the 4 per cent inflation target remains appropriate, especially considering the weightage of food in the Consumer Price Index (CPI) basket.

The report said "the target range can be narrowed further to 1 per cent -1.5 per cent as in the case of some of the Asian peers like Indonesia".

This would make monetary policy more effective.

The report explained that a tighter tolerance band, as seen in some Asian peers like Indonesia, helps strengthen policy credibility, while a wider band reduces its impact.

On the debate over targeting headline inflation versus core inflation, the report said headline inflation remains more relevant for India.

While food's share in the CPI basket is expected to fall with the upcoming base revision and is already under 50 per cent as per the 2023-24 consumption survey, food spending still exceeds 50 per cent for the lowest income groups.

This makes headline inflation a more accurate measure for monetary policy, given the importance of food prices in household budgets.

The RBI's monetary policy review paper is now open for public feedback. The final decision on changes to the inflation targeting framework will be taken in April 2026.

- ANI

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Reader Comments

P
Priya S
But will this work for India? Our economy is so different from Indonesia. Monsoon failures, global oil prices, and food supply chains affect inflation much more here. RBI needs flexibility during crises.
A
Aditya G
Finally some sense! The current 2-6% band is too wide. When inflation hits 6%, middle class families really feel the pinch. A tighter target will protect our purchasing power better.
S
Sarah B
As someone working in finance, I appreciate this technical approach. Credibility in monetary policy attracts foreign investment and stabilizes the rupee. Good for long-term economic growth.
K
Kavya N
They're right about focusing on headline inflation. For most Indian families, food prices matter more than anything else. When tomatoes and onions become expensive, everything else follows.
M
Michael C
While the intention is good, I worry about overtightening. Higher interest rates to control inflation could hurt small businesses and job creation. Need balanced approach.

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