ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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New Kid on the Economic Policy Block

The RBI and the government have decided to adopt the discredited policy of inflation targeting.

With a missionary zeal, the Reserve Bank of India (RBI) and the government have pushed ahead with inflation targeting as the core of future monetary policy. An agreement on a monetary policy framework has been signed, committing the RBI to bring inflation below 6% by January 2016 and a target of 4% with a band of +/- 2% for 2016–17 and all subsequent years.

For some time now, the RBI has been explicitly working towards this goal of inflation targeting. Various committees like the 2008 Committee on Financial Sector Reforms (constituted by the Planning Commission with the current Governor of RBI Raghuram Rajan as chairman) and the 2013 Financial Sector Legislative Reforms Commission spoke in its favour. Initially it appeared that the RBI was against adopting any inflation targeting framework and, in fact, the then RBI Governor D Subbarao spoke, in 2011, eloquently delineating the central bank’s position. With Raghuram Rajan becoming the Governor of RBI and the emergence of a single Consumer Price Index (CPI) to track inflation, the decks were cleared for a 180 degree turn in the RBI’s position. Subsequently, following the recommendations of the Committee to Revise and Strengthen the Monetary Policy Framework, with RBI Deputy Governor Urjit Patel as chairman, inflation targeting became synonymous with “a strong, transparent, predictable and effective monetary policy framework (that) is needed to deliver low inflation.”

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