{"id":220067,"date":"2022-12-27T20:01:36","date_gmt":"2022-12-27T14:31:36","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=220067"},"modified":"2022-12-27T20:01:36","modified_gmt":"2022-12-27T14:31:36","slug":"inflation-and-agency-accountability","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/inflation-and-agency-accountability\/","title":{"rendered":"Inflation and agency accountability"},"content":{"rendered":"\n

Source<\/span><\/b>: The post is based on the article <\/span>\u201cInflation and agency accountability\u201d <\/span><\/b>published in<\/span> the <\/span>Business Standard <\/span><\/b>on <\/span>27th December 2022<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

Syllabus: <\/span><\/b>GS3- Indian economy<\/span>\u00a0<\/span><\/p>\n

Relevance:<\/span><\/b>\u00a0Issues related to the concept of inflation<\/span>\u00a0<\/span><\/p>\n

News<\/span><\/b>: The article explains the issues related to the inflation-targeting regime in India. It explains the creation of the concept of inflation targeting across the world.<\/span>\u00a0<\/span><\/p>\n

How have the concepts of inflation targeting and central bank independence developed?<\/span><\/b>\u00a0<\/span><\/h5>\n

Fiat money was invented many centuries ago. It was made by the Central Banks. Despite having many advantages, fiat money and Central Banks faced many issues.\u00a0<\/span>\u00a0<\/span><\/p>\n

It led to the creation of the thinking that Central Banks should be <\/span>independent agencies<\/span><\/b>. It should focus on delivering <\/span>low, stable and predictable inflation<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n

Inflation targeting and central bank independence<\/span><\/b> generally worked well. It rapidly spread from one country to the next.\u00a0<\/span>\u00a0<\/span><\/p>\n

There is by now enough evidence that economic performance in a country improves after this reform is implemented.<\/span>\u00a0<\/span><\/p>\n

What led to the formation of the Monetary Policy Committee in India?<\/span><\/b>\u00a0<\/span><\/h5>\n

Many committees like <\/span>Committee on Financial Sector Reforms, 2009 and Financial Sector Legislative Reforms Commission, 2013, chaired by B N Srikrishna<\/span><\/b> suggested an inflation-targeting regime.<\/span>\u00a0<\/span><\/p>\n

In 2014, <\/span>Urjit Patel Committee<\/span><\/b> endorsed the idea of inflation targeting and the statutory Monetary Policy Committee.<\/span>\u00a0<\/span><\/p>\n

The formal announcement on this was made in the first budget speech of the new government in 2014. The <\/span>Monetary Policy Framework Agreement<\/span><\/b> was signed in February 2015.\u00a0<\/span>\u00a0<\/span><\/p>\n

In September 2016, Parliament amended the<\/span> RBI Act of 1934<\/span><\/b> for creating a statutory MPC for maintaining <\/span>price stability<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

How has it worked for the Indian economy?<\/span><\/b>\u00a0<\/span><\/h5>\n

Due to limitations of the I<\/strong><\/span>ndian financial system<\/span><\/b>, inflation targeting would have worked poorly.\u00a0<\/span>\u00a0<\/span><\/p>\n

There are important weaknesses in the <\/span>Indian bond market<\/span><\/b> and banking sector. The <\/span>bond-currency-derivatives nexu<\/span><\/b>s<\/strong> is missing. The <\/span>monetary policy transmission<\/span><\/b> is therefore weak.\u00a0<\/span>\u00a0<\/span><\/p>\n

Hence, RBI can not deliver on a <\/span>precise inflation targe<\/span><\/b>t<\/strong> like developed countries. Instead, the RBI was given a wide goalpost. It was delivering inflation in the <\/span>range from 2 to 6%<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

For some years, this worked well and India achieved <\/span>price stability<\/span><\/b>. In recent years, though, there are concerns that inflation has regularly <\/span>surpassed 6%<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n

What is the way forward for the inflation-targeting regime?<\/span><\/b>\u00a0<\/span><\/h5>\n

Theoretically, there are <\/span>four possibilities<\/span><\/b> through which a central bank can fail on its target. These are wrong statistics, wrong forecasts, wrong decisions of MPC, and bad transmission of monetary policy.<\/span>\u00a0<\/span><\/p>\n

Every time there is a failure in achieving the inflation target, India needs to analyse the cause of the failure. Once the cause is found out, we must undertake <\/span>remedial action<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n

This is the task of Parliament. It must review its contract with the RBI and <\/span>modify the contract<\/span><\/b> in ways that will ensure better performance by the agent.\u00a0<\/span>\u00a0<\/span><\/p>\n

It would be useful to have a<\/span> public release of the RBI\u2019s self-assessment<\/span><\/b> of its failure and its own views on the required remedial measures. The document should be released in the<\/span> public domain<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n

In addition to the RBI report, the models and data and slideshows used in the MPC meeting should be released.\u00a0<\/span>\u00a0<\/span><\/p>\n

Each MPC member should be obliged to write and sign a <\/span>1000-word rationale statement<\/span><\/b> that explains her voting decision. It will lead to greater <\/span>individual accountability<\/span><\/b> of MPC members for their voting decision.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on the article \u201cInflation and agency accountability\u201d published in the Business Standard on 27th December 2022.\u00a0 Syllabus: GS3- Indian economy\u00a0 Relevance:\u00a0Issues related to the concept of inflation\u00a0 News: The article explains the issues related to the inflation-targeting regime in India. It explains the creation of the concept of inflation targeting… Continue reading Inflation and agency accountability<\/span><\/a><\/p>\n","protected":false},"author":10311,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[10503,216],"class_list":["post-220067","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-business-standard","tag-gs-paper-3","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":1700776752,"cached_date":1704945040},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/220067","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10311"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=220067"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/220067\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=220067"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=220067"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=220067"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}