{"id":70993,"date":"2020-09-26T17:00:17","date_gmt":"2020-09-26T11:30:17","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=70993"},"modified":"2020-11-26T17:05:14","modified_gmt":"2020-11-26T11:35:14","slug":"demand-to-rework-inflation-targeting-regime","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/demand-to-rework-inflation-targeting-regime\/","title":{"rendered":"Demand to Rework Inflation Targeting Regime"},"content":{"rendered":"<p><strong><b>Source:\u00a0<\/b><\/strong><a href=\"https:\/\/indianexpress.com\/article\/opinion\/columns\/india-economy-inflation-monetary-policy-committee-6612032\/\"><strong><u><b>Indian Express<\/b><\/u><\/strong><\/a><\/p>\n<blockquote><p><strong><b>Gs3:<\/b><\/strong>\u00a0<strong><b>Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.<\/b><\/strong><\/p><\/blockquote>\n<p><strong><b>Context:\u00a0<\/b><\/strong>Recently the monetary policy committee (MPC) concluded that elevated inflation has constrained it from easing policy rates.<\/p>\n<p><strong><b>Why there is demand to rework inflation targeting regime?<\/b><\/strong><\/p>\n<ul>\n<li><b><\/b><strong><b>Economy slowdown:<\/b><\/strong>Since the growth rate is falling that is why question have been raised regarding the inflation targeting framework.<\/li>\n<li><b><\/b><strong><b>Growth-inflation quagmire:<\/b><\/strong>there is demand for the government to relax the inflation targeting framework to spur growth and demand.<\/li>\n<\/ul>\n<p><strong><b>Suggestions:<\/b><\/strong><\/p>\n<ul>\n<li><b><\/b><strong><b>Greater tolerance for higher levels of inflation <\/b><\/strong>either by adjusting the acceptable range of inflation upwards, or by extending the period over which the MPC has to meet its inflation target.<\/li>\n<li><b><\/b><strong><b>Shift from headline to core-inflation <\/b><\/strong>as the nominal anchor of monetary policy.<\/li>\n<li><b><\/b><strong><b>Incorporate other indicators such as nominal GDP <\/b><\/strong>explicitly into the framework.<\/li>\n<li>Doing away with the inflation targeting framework altogether.<\/li>\n<\/ul>\n<p><strong><b>What are possible way outs and their implications?<\/b><\/strong><\/p>\n<p><strong><b>Easing policy rate:<\/b><\/strong><\/p>\n<ul>\n<li>It will inject a degree of uncertainty and unpredictability in monetary policy.<\/li>\n<li>Frequent revisions will destabilise household expectations.<\/li>\n<li>It will signal a lack of commitment to maintaining price stability.<\/li>\n<\/ul>\n<p><strong><b>Shift to a multiple indicator structure<\/b><\/strong>:<\/p>\n<ul>\n<li>This move harks back to the pre-MPC days when there was\u00a0<strong><b>far greater uncertainty <\/b><\/strong>over monetary policy.<\/li>\n<li><b><\/b><strong><b>No clarity over the indicator <\/b><\/strong>that was dictating the stance of the RBI governor.<\/li>\n<li>Absence of a well-defined anchor will\u00a0<strong><b>reduce transparency and accountability <\/b><\/strong>from the central bank.<\/li>\n<\/ul>\n<p><strong><b>Central bank financing the Centre\u2019s capital expenditure on a regular basis.<\/b><\/strong><\/p>\n<ul>\n<li><b><\/b><strong><b>Monetisation should be the last resort<\/b><\/strong>: The perils of falling back on this long-discarded policy need to be guarded against.<\/li>\n<li><b><\/b><strong><b>Tilt the balance of power in favour of the government<\/b><\/strong>: Government owing to its short-term political imperatives will be seduced by the apparent simplicity of this idea without considering its long-term repercussions.<\/li>\n<li><b><\/b><strong><b>Channel funds to revenue expenditure:<\/b><\/strong>It will lead to a situation wherein the entire budgeted capital expenditure is financed by the central bank.<\/li>\n<li><b><\/b><strong><b>Blur the line between fiscal and monetary policy :<\/b><\/strong>Giving a central bank a degree of control over the government\u2019s expenditure priorities will allow unelected technocrats to be in charge of determining the expenditure priorities of the government. It will result in the\u00a0<strong><b>fiscalisation of monetary policy.<\/b><\/strong><\/li>\n<\/ul>\n<p><strong><b>Pledge Government shares in companies to avail loans against them:<\/b><\/strong><\/p>\n<ul>\n<li>It raises questions whether a sovereign should pledge assets to borrow in the local currency.<\/li>\n<li>In 1991, India had pledged gold for a foreign currency denominated loan not a local currency loan.<\/li>\n<li>There is not clarity on what will happen if the value of the shares pledged falls below that of the loan.<\/li>\n<\/ul>\n<p><strong><b>What is the way forward?<\/b><\/strong><\/p>\n<ul>\n<li>There is need topush for\u00a0<strong><b>more external voices in the MPC<\/b><\/strong>. For instance, In the UK, a\u00a0<strong><b>non-voting treasury representative<\/b><\/strong>\u00a0sits with the MPC to discuss policy issues.<\/li>\n<li>During periods of extreme uncertainty, there is need to adopt some unconventional measures but the principles of\u00a0<strong><b>sound public policy<\/b><\/strong>should not be discarded.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Source:\u00a0Indian Express Gs3:\u00a0Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment. Context:\u00a0Recently the monetary policy committee (MPC) concluded that elevated inflation has constrained it from easing policy rates. Why there is demand to rework inflation targeting regime? Economy slowdown:Since the growth rate is falling that is why question have been&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/demand-to-rework-inflation-targeting-regime\/\">Continue reading <span class=\"screen-reader-text\">Demand to Rework Inflation Targeting Regime<\/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],"tags":[1283],"class_list":["post-70993","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","tag-eco_1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704837223},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/70993","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=70993"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/70993\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=70993"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=70993"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=70993"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}