A study by RBI economists that inflation expectations stabilized around the range of 9-10 per cent for households and 4-5 per cent for professional forecasters. While actual inflation has remained below 6 per cent- the upper band of the target.
India formally adopted flexible inflation targeting (FIT) in June 2016 to place price stability, defined in terms of a target CPI (consumer price index) inflation, as the primary objective of the monetary policy. The government has mandated 4 per cent target for CPI inflation with a band of plus, minus 2 per cent.
FIT focuses on anchoring inflation expectations of the public through a credible commitment to a publicly announced inflation target. This increases the probability of maintaining price stability on a durable basis.
CPI inflation consistently remained above the upper band of the target between above April and November caused largely by supply side constraints created by the pandemic induced nation-wide lockdown.
“On a relative basis, RBI has been successful in triggering a decline in inflation expectations” said Rahul Bajoria, chief India economist at Barclays Capital. ” It is not uncommon that expectations will always be above target levels, as consumers always conflate between asset prices and consumer prices” The inflation outlook of households’ expectations were susceptible to fuel price shocks, based on recent experiences, RBI said.
This trend is also seen across the globe including the advanced as well emerging markets the report notes. “Expectations of professional forecasters generally stabilise around the inflation target relatively quickly while expectations of households generally exceed the inflation target/ upper tolerance band, often taking several years to moderate after formal adoption of inflation targeting.” it said
The influence of actual inflation on inflation expectations (IE) has dropped significantly from peak levels of 2010-2014, for one year ahead inflation expectations of both households and professional forecasters, notes a study by RBI economists.