Assessing the Impacts and Policy Alternatives
Edited by Gerald A. Epstein and A. Erinc Yeldan
Chapter 12: Inflation Targeting and the Design of Monetary Policy in India
Raghbendra Jha1 INTRODUCTION 12.1 With around 20 central banks adopting it as their basic monetary policy framework, inflation targeting (IT) has emerged as an important monetary policy framework. Over time IT has become more flexible in its interpretation of target and permitted other goals to be included in the basic framework. Central banks have enhanced their communication with their respective publics about their targets and modus operandi. Some authors have argued that for transition economies undergoing sustained financial liberalization and integration in world financial markets, IT is an attractive monetary policy framework. Consequently there is pressure for such economies to adopt IT. This chapter evaluates the case for IT in India. It begins in Section 12.2 by stating the objectives of monetary policy, especially that inflation control cannot be an exclusive concern of monetary policy in a country with mass poverty. An evaluation of the rationale for IT and nuances of implementation are spelt out in Section 12.3. Section 12.4 provides some evidence on the effects of IT in developed and transition economies. Section 12.5 discusses India’s experience with using nominal targets whereas Section 12.6 discusses some recent developments in Indian monetary policy. Section 12.7 reviews some reasons why India is not ready for IT. Section 12.8 shows that even if the Reserve Bank of India (RBI) – India’s central bank – wanted to, it could not pursue IT since the shortterm interest rate (the principal policy tool used to affect inflation in countries using IT) does not have significant effects on...
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