Inflation: targeting in India Is Premature

Abstract

The finance minister recently stated that the government would decide on an inflation target for RBI to follow. Earlier, the RBI Governor had observed that he was waiting for the government to approve the inflation-targeting regime for RBI. The Urjit Patel Committee Report, which primarily mentions the implementation of inflation-targeting for India, has proposed that the new consumer price index-combined (CPI) should be the nominal anchor for inflation-targeting in India. But herein is a flaw which needs careful examination both for its content and its timing. Historically, inflation-targeting was popular with the central banks and international institutions for more than a decade, but only until 2008. In view of the recent financial crisis and rethinking of the economic strategies that went wrong before 2008 compels one to conclude that the role of economic blinkers that inflation-targeting imposed on the policy makers cannot be ignored in the great recession. It is for this precise reason that no new country has implemented inflation-targeting in recent years. In the case of India, there are a few more compulsions that need to be addressed. The most important consideration are supply-side constraints that contribute to inflationary pressures which cannot be addressed by the instruments wielded by RBI, especially for food items and fuel. Read more at: https://www.financialexpress.com/archive/inflation-targeting-in-india-is-premature/1233820/