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

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A Performance Appraisal of the Inflation Targeting Regime

The recently published Report on Currency and Finance, 2020–21 of the Reserve Bank of India reviewed the performance of the flexible inflation targeting regime in India. In the light of stylised facts, cross-country experience, and detailed econometric results, the report seemed to suggest that despite several shocks (like demonetisation or introduction of the goods and services tax), a combination of good policy and luck have worked in favour of the success of the FIT regime in India. Going forward, while advocating some nuanced, subtle changes in the operation and administration of the FIT regime, the report called for its continuation as a strategy of monetary policy in India.

 

Inflation targeting, or what is formally known as flexible inflation targeting (FIT) in the Indian context, was adopted in India in the late 2016. Now that four years have passed, it is imperative that an assessment should be done about the performance of the FIT regime in India. It is also in line with the original mandate of having a review of the policy framework by March 2021. The recently released Reserve Bank of India’s (RBI) Report on Currency and Finance, 2020–21 precisely does that analytically, objectively, and competently. This theme-based Report on Currency and Finance makes its reappearance after a gap of 13 years (the last one being published in 2013). Spread over five chapters and drawing perspectives from both the Indian as well as the global experience, the report has dealt with two distinct issues, namely (i) performance of the FIT regime in India; and (ii) implication of certain aspects of the strategy of monetary policy for the FIT regime. The report’s verdict appears to be as follows: despite a number of shocks (like demonetisation, the introduction of the goods and services tax [GST], or the ongoing COVID-19 pandemic), a combination of good policy and luck seemed to have worked in favour of the FIT regime in India.

The Context

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Updated On : 10th Apr, 2021

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