Academic journal article Indian Journal of Economics and Business

Inflation Targeting in India: Select Issues

Academic journal article Indian Journal of Economics and Business

Inflation Targeting in India: Select Issues

Article excerpt


Adoption of inflation targeting in India has been a much debated topic which also becomes a challenge for the emerging economy. Though inflation targeting has already been adopted in many countries, acceptability in India is a matter of concern. The paper argues that India needs to consider the composition of consumer price index; state of macro econometric models; young demographics, unemployment and lack of social security before adopting inflation targeting.

To modernize the monetary policy framework, India could consider introducing regular review of the regional economy; instituting a Monetary Policy Committee; separating debt from monetary management, the paper argues.

Jel Codes: E310, E370, E580

Keywords: Inflation, Inflation targeting, Monetary policy, Consumer price index


Inflation Targeting could be the next major policy measure adopted in India as the proposal is under active consideration by the Reserve Bank of India (RBI) and the Government of India. In recent years, there has been a debate on the monetary policy framework in the country, basically anchored around the philosophy of adopting inflation targeting (IT) in India.

IT targets the inflation rate and not the price level and is distinct from monetary targeting and interest rate targeting. IT regime assumes that price stability is explicitly the mandate; a quantitative target for inflation is publicly announced; monetary policy is based on an inflation forecast; there is transparency in monetary operations; and that accountability mechanism is in place [Roger, 2010; Hammond, 2012],

In this brief and focused article, select issues on implementing inflation targeting in India are discussed. The evolution of inflation targeting and relevant experience of select countries is presented in Section 2 of this paper. Section 3 presents a discussion on applicability of inflation targeting in India. Modernisation of the monetary policy framework in India is examined in Section 4 and finally, conclusions are presented in Section 5.


The key policy objective of central banking is price stability, and the concept of giving it a numerical precision was considered very modern after monetary and exchange rate targeting had failed in the 1980s. The hunt for a better target led to experimentation with a checklist of economic indicators by Australia in mid-1980s and explicit squeezing of inflations rate by New Zealand by late eighties [Singleton, 2011]. After some trials and initial success, the IT regime was formally inaugurated in March 1990 in New Zealand with the negotiation of the first Policy Targets Agreement between the Government and the central bank. Historically, some countries, of which a few at the push of the International Monetary Fund (IMF), switched to IT after the successful adoption by New Zealand (1990), Canada (1991), and UK (1992). The spread of IT was contagious and according to Mahadeva and Sterne [2000], 54 countries had adopted IT by 1998. And, by 2004, according to Rose [2007] formal inflation targeting was in place in a number of countries making up one-quarter of world economy. The situation changed after the recent financial crisis and rethinking of the economic strategies that went wrong before 2008 compelling many economists and policy makers to conclude that the role of economic blinkers that IT imposed on the policy makers cannot be ignored [Frankel, 2012], Marcus [2014] observed that application of IT in an emerging country like South Africa faced many challenges - opposition of the trade union; disagreement on limits of transparency; arguments whether IT regime was sufficient to ensure price stability; and finally, questions of the level of targets. It probably is for similar reasons that none of the countries have adopted IT after 2008, except Japan in 2013 but with a different motivation. …

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