{"id":347563,"date":"2025-10-07T19:37:27","date_gmt":"2025-10-07T14:07:27","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=347563"},"modified":"2025-10-11T13:18:28","modified_gmt":"2025-10-11T07:48:28","slug":"why-fine-tuning-inflation-targeting-is-needed-in-india","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/why-fine-tuning-inflation-targeting-is-needed-in-india\/","title":{"rendered":"Why fine tuning inflation targeting is needed in India"},"content":{"rendered":"<p><strong>Source: <\/strong>The post <strong>Why fine tuning inflation targeting is needed in India <\/strong>has been created, based on the article \u201c<strong>Fine-tuning \u2018 inflation targeting\u2019\u201d <\/strong>published in<strong> &#8220;Bussiness Line\u201d<\/strong> on<strong> 7 October 2025. Why fine tuning inflation targeting is needed in India.<\/strong><\/p>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-347819\" src=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/10\/Why-fine-tuning-inflation-targeting-is-needed-in-India.png?resize=478%2C317&#038;ssl=1\" alt=\"Why fine tuning inflation targeting is needed in India\" width=\"478\" height=\"317\" srcset=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/10\/Why-fine-tuning-inflation-targeting-is-needed-in-India.png?resize=300%2C199&amp;ssl=1 300w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/10\/Why-fine-tuning-inflation-targeting-is-needed-in-India.png?resize=1024%2C680&amp;ssl=1 1024w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/10\/Why-fine-tuning-inflation-targeting-is-needed-in-India.png?resize=768%2C510&amp;ssl=1 768w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/10\/Why-fine-tuning-inflation-targeting-is-needed-in-India.png?w=1280&amp;ssl=1 1280w\" sizes=\"auto, (max-width: 478px) 100vw, 478px\" \/><\/p>\n<p><strong>UPSC Syllabus: <\/strong>GS-3-Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.<\/p>\n<p><strong>Context: <\/strong>The <strong>RBI\u2019s discussion paper (2025)<\/strong> re-examines FIT, suggesting that while it should continue, it needs <strong>adjustment and flexibility<\/strong> to suit <strong>emerging-market realities<\/strong>.<\/p>\n<ul>\n<li><strong>Inflation Targeting (IT)<\/strong> is a <strong>monetary policy framework <\/strong>under which a central bank keeps inflation within a specified band to ensure price stability.<\/li>\n<li><strong>Flexible Inflation Targeting (FIT)<\/strong>, adopted by India in <strong>2016<\/strong>, allows balancing <strong>price stability<\/strong> with <strong>growth objectives<\/strong>.\n<ul>\n<li>The concept of flexibility was initially derived from <strong>advanced economy models<\/strong>, but <strong>emerging economies need customised FIT frameworks<\/strong> due to higher exposure to external shocks.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><strong>Why <\/strong><strong>fine tuning of FIT is needed<\/strong><\/h2>\n<ol>\n<li><strong>Historical inflation trends<\/strong> show that before FIT (1970\u20132014), average CPI inflation was around <strong>8%<\/strong>, while post-FIT it fell to <strong>5%<\/strong>. However, growth performance weakened, <strong>revealing a potential trade-off between inflation control and output expansion.<\/strong><\/li>\n<li>Despite large external shocks<strong>, CPI inflation has broadly remained around 4\u20136%, showing FIT\u2019s success,<\/strong> yet frequent breaches above the target since <strong>2018\u201319<\/strong> call for recalibration.<\/li>\n<li><strong>Excess monetary tightening<\/strong> <strong>has proven counterproductive in the past,<\/strong> such as in the 1970s and 1990s, where high real interest rates coincided with low growth without curbing inflation.<\/li>\n<li><strong>High WPI inflation<\/strong> <strong>during 2021\u201323 did not transmit severely to consumer inflation because fuel price declin<\/strong>es benefited consumers and firms, suggesting that headline inflation alone may not capture the full picture.<\/li>\n<li><strong>Supply shocks<\/strong> and<strong> commodity price volatility have become persistent<\/strong>, requiring flexibility rather than a rigid adherence to targets.<\/li>\n<li>For <strong>emerging markets (EMs)<\/strong> like India, structural factors such as agricultural dependence, fiscal constraints, and energy imports make a more nuanced approach essential.<\/li>\n<\/ol>\n<h2><strong>Key Recommendations<\/strong><\/h2>\n<ol>\n<li><strong>Adjusting FIT Parameters<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>Headline CPI should remain the primary target because it reflects the cost of living and affects household expectations. The target band of 4% \u00b1 2% is appropriate but should be applied flexibly, allowing temporary deviations during supply shocks.<\/li>\n<li>Policymakers should exercise measured discretion instead of adopting aggressive monetary tightening in response to short-term inflation spikes.<\/li>\n<\/ol>\n<\/li>\n<li><strong>\u00a0Preserving Flexibility and Discretion<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>The FIT framework should reduce arbitrary discretion while maintaining enough space for the Monetary Policy Committee (MPC) to respond to evolving conditions.<\/li>\n<li>The composition and functioning of the MPC should ensure continuity and institutional memory, avoiding abrupt changes.<\/li>\n<\/ol>\n<\/li>\n<li><strong>Improving Forecasting and Communication<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>Inflation forecasts should focus on month-to-month momentum rather than relying solely on base effects.<\/li>\n<li>Independent academic forecasts should complement RBI projections to strengthen transparency and credibility.<\/li>\n<li>Inflation indices must be rebased and updated periodically to reflect changes in consumption patterns.<\/li>\n<li>Clear and transparent communication will help anchor market expectations and reduce volatility.<\/li>\n<\/ol>\n<\/li>\n<li><strong>Enhancing Coordination with Fiscal and Structural Policy<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>Price stability depends not only on monetary policy but also on fiscal discipline and coordinated supply-side management.<\/li>\n<li>The government must share responsibility for controlling food and fuel prices, which are key drivers of inflation.<\/li>\n<li>Coordination between the RBI and the government can help mitigate pro-cyclical fiscal shocks.<\/li>\n<\/ol>\n<\/li>\n<li><strong>Retaining Core Monetary Framework<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>The repo rate should continue to be the primary instrument of monetary policy.<\/li>\n<li>The independence of the MPC must be maintained while ensuring predictability and transparency in decision-making.<\/li>\n<li>Liquidity shocks should be addressed through targeted interventions rather than across-the-board tightening.<\/li>\n<\/ol>\n<\/li>\n<li><strong>Diversifying Instruments for Emerging Markets<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>Emerging market central banks, including the RBI, should use a wider set of tools\u2014such as liquidity operations, foreign exchange interventions, reserve management, and macroprudential measures to deal with multiple sources of shocks.<\/li>\n<li>Maintaining durable liquidity during supply shocks is crucial to avoid financial stress.<\/li>\n<li>Policymakers should avoid excessive dependence on the interest-rate channel alone.<\/li>\n<\/ol>\n<\/li>\n<li><strong>Anchoring Expectations<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>Communication should use both headline and core inflation indicators to clarify the central bank\u2019s stance.<\/li>\n<li>In emerging markets, inflation expectations tend to adjust slowly; therefore, persistent communication and credibility-building are essential.<\/li>\n<li>Policymakers should emphasise that inflation from temporary supply shocks does not represent a long-term trend.<\/li>\n<\/ol>\n<\/li>\n<li><strong>Protecting Growth and the Poor<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>Low-income households are most vulnerable to high inflation and need protection through price stability.<\/li>\n<li>However, maintaining low inflation must not come at the expense of growth and employment, which are equally vital for welfare.<\/li>\n<\/ol>\n<\/li>\n<li><strong>Managing Supply Shocks<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>Explicit, pre-announced policy responses to global oil price movements can help stabilize expectations.<\/li>\n<li>Targeted fiscal actions should complement monetary policy to address supply-side inflation rather than relying on rate hikes alone.<\/li>\n<\/ol>\n<\/li>\n<li><strong>Maintaining Market Confidence<\/strong>\n<ol style=\"list-style-type: lower-alpha;\">\n<li>A credible, well-communicated, and flexible FIT framework enhances investor confidence.<\/li>\n<li>Predictability and transparency in policy reduce risk premiums and borrowing costs for businesses and households.<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<h2><strong>Way Forward<\/strong><\/h2>\n<ol>\n<li>India should retain the FIT framework but make it more adaptable to domestic and global challenges.<\/li>\n<li>Forecasting accuracy must be improved using better models and data transparency.<\/li>\n<li>Joint accountability between the government and the RBI should be institutionalized for handling supply shocks.<\/li>\n<li>Public awareness campaigns can help align inflation expectations with the central bank\u2019s objectives.<\/li>\n<li>The FIT framework should be reviewed every five years to ensure its continued relevance and effectiveness.<\/li>\n<\/ol>\n<p><strong>Conclusio<\/strong><strong>n: <\/strong>India\u2019s experience proves that <strong>inflation targeting works<\/strong>, but rigid application can harm growth. A <strong>fine-tuned, flexible FIT<\/strong> will better balance <strong>price stability<\/strong>, <strong>growth<\/strong>, and <strong>employment<\/strong>. Emerging economies must tailor FIT to <strong>their structural and institutional realities<\/strong>, using <strong>multiple tools<\/strong>, <strong>coordinated policies<\/strong>, and <strong>transparent communication<\/strong> to enhance macroeconomic stability. Thus, FIT should evolve into a <strong>context-sensitive, flexible discipline<\/strong>, anchoring inflation expectations while supporting inclusive growth.<\/p>\n<p><strong>Question:<\/strong> Why and how should emerging economies, including India, adapt flexible inflation targeting (FIT) to their unique conditions?<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Source: The post Why fine tuning inflation targeting is needed in India has been created, based on the article \u201cFine-tuning \u2018 inflation targeting\u2019\u201d published in &#8220;Bussiness Line\u201d on 7 October 2025. Why fine tuning inflation targeting is needed in India. UPSC Syllabus: GS-3-Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/why-fine-tuning-inflation-targeting-is-needed-in-india\/\">Continue reading <span class=\"screen-reader-text\">Why fine tuning inflation targeting is needed in India<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":347819,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230],"tags":[12044,216,8184],"class_list":["post-347563","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-9-pm-daily-articles","tag-business-line","tag-gs-paper-3","tag-indian-economy","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/10\/Why-fine-tuning-inflation-targeting-is-needed-in-India.png?fit=1280%2C850&ssl=1","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/347563","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\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=347563"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/347563\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/347819"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=347563"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=347563"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=347563"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}