A decade after adopting flexible inflation targeting, ex-RBI deputy governor Michael Debabrata Patra highlights the regime’s success in maintaining price stability through diverse shocks and advocates for aligning India’s inflation goal with global norms amid structural changes.
A decade after India embraced flexible inflation targeting, former Reserve Bank of India deputy governor Michael Debabrata Patra says the regime’s central achievement has been to keep price growth broadly aligned with the 4% objective through very different shocks, from commodity swings and the pandemic to wars and renewed supply disruptions.
In an email interview with Subrata Panda of Business Standard, Patra argued that the strongest proof lies in the data itself. He pointed out that headline inflation averaged 4.5% in the first five years of the framework and 4.9% in the next five, despite the second period including the war in Ukraine, conflict in West Asia and other disturbances. In his view, that pattern suggests the outcome was not simply the result of good fortune or favourable external conditions, but of the framework itself. The Reserve Bank’s monetary policy framework sets 4% consumer price inflation, with a band of 2 percentage points on either side, as the operating target.
Patra also defended the degree of flexibility built into the regime, saying it was one of its most important design features. He said the framework’s tolerance for temporary breaches, along with its willingness to give growth meaningful weight during the pandemic, helped limit both economic and welfare losses. The RBI framework itself describes flexible inflation targeting as a system that gives priority to price stability while still taking account of output and growth. Patra said that balancing act was especially important when inflation rose above the tolerance band during the Covid-19 shock.
At the same time, he said one institutional weakness was the way external monetary policy committee members rotate out together, which, in his view, can break the continuity of experience that internal members naturally build up over time. Patra described the committee’s decision-making as more contested than the final public statement might suggest, with internal members arguing over data, forecasts and changing macroeconomic conditions in the run-up to each meeting. He added that dissent is not a flaw but part of a healthy central banking process, even if the MPC presents its final position with a degree of calm unanimity once the vote is taken.
On the question of whether monetary policy can do much when India’s inflation shocks are driven mainly by food or fuel, Patra said the answer is yes, although the instrument is blunt. In his telling, the central bank’s first task is to absorb the initial blow and buy time for more targeted tools, such as supply-side measures, to work. If those sectoral pressures linger and spread into wages, transport, rents and broader core prices, he said the case for tighter policy becomes unavoidable, even if growth takes a hit. That view is broadly consistent with the RBI’s own framework, which treats price stability as the primary objective while keeping growth in view.
Patra said the lessons from the 2022 breach of the upper tolerance band were not unique to India, but were shared by central banks around the world. He said many policymakers underestimated the extent to which demand had revived after lockdowns, even as they remained focused on supply bottlenecks. His prescription was to act early when inflation begins to embed itself, rather than waiting for the data to harden. He also pushed back against criticism that anti-inflation policy inevitably damages growth, saying India’s post-2022 experience shows the opposite: once inflation was brought under control, growth remained strong.
He was equally cautious about the way inflation is communicated. Patra said headline inflation must remain the benchmark because that is what households experience, even if the RBI increasingly examines core inflation, which strips out volatile food and fuel items, in its analysis and forecasts. He said such forecasts can help markets understand underlying pressures, but they are harder to explain to the public if they appear to ignore a large part of day-to-day price pain. Looking ahead, he said the inflation target should not be treated as fixed for all time. Instead, it should reflect the economy’s underlying trend rate of inflation, which can shift with structural change, including the spread of artificial intelligence. In his view, if India is to become an advanced economy, its inflation objective will ultimately need to converge with the 2% average now typical of richer economies.
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