Inflation Targeting: Dilemma for India

Finally India after facing a downturn in its growth path decided to review its monetary policy to avert such crises of stagflation in the future. In the wake of this Reserve Bank of India (RBI) formed a committee headed by the renowned economists of India URJIT PATEL to give recommendations for the future monetary policy of India.

As a result after a long time it gave its recommendations out of which its main opinion was to anchor the monetary policy to the Consumer Price Index (CPI) i.e. in short it recommended RBI to go for inflation targeting, aiming 4% inflation with a bracket of +2% and -2% and to establish a separate panel for the monetary policy headed by the governor of RBI.

Many, in fact all the EME’s (Emerging Market Economies) have been following the policy of inflation targeting and hence has averted the rise in inflation in their country at the backdrop of the easy monetary policies followed by the countries in order to recover from the global crises. India which is always a special case didn't followed it had to experience a high inflation, highest among all the EME’s.

It’s believed widely that anchoring inflation to the CPI would lead to shift of focus from the growth of the country (which is already low), as there’s always a trade-off between the inflation and growth. But this myth has been busted as it has been found that though they both have a trade-off in the short run but in the medium run its beneficial for the economy as benefits of lower prices automatically converts into higher growth, better investment decisions as they don’t have to take into account the fluctuation of the price level and the interest rates.

It do have certain drawbacks like there would occur asymmetry of information between the monetary policy, RBI, and the government. There might be pressure by the government on the separate monetary policy panel to frame the monetary policy as per its election game plan.

But in the long run it’s a win- win situation, you have more money in the pocket and the shopping bill is also low. At preset we can just wait and hope that RAGHUNOMICS who is in favor of these recommendations accept them.