{"id":96234,"date":"2021-03-19T11:09:21","date_gmt":"2021-03-19T05:39:21","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=96234"},"modified":"2021-03-19T11:52:47","modified_gmt":"2021-03-19T06:22:47","slug":"relevance-of-inflation-targeting-in-india","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/relevance-of-inflation-targeting-in-india\/","title":{"rendered":"Relevance of Inflation Targeting in India"},"content":{"rendered":"\n<p><strong>Synopsis<\/strong>: Inflation control will always be relevant. But there is no conclusive evidence that the policy of<a href=\"https:\/\/forumias.com\/blog\/ways-to-strengthen-indias-democracy\/\"> inflation targeting<\/a> has worked in India.<\/p>\n<h5><strong>Background<\/strong><\/h5>\n<ul>\n<li>The RBI was tasked with a mandate of the inflation target of 4 percent with a 2% deviation either way in June 2016. This agreement between the centre and the RBI is set to end by march-31-2020.<\/li>\n<li>It has been acknowledged that in these 5 years period (2016-2021) after inflation targeting was introduced,\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Inflation rate has remained within the prescribed band of 2% to 6%.<\/li>\n<li>Also, the RBI has been successful in anchoring inflationary expectations.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li>Against this backdrop, this article evaluates the success of inflation targeting as an effective monetary policy in India.<\/li>\n<\/ul>\n<h5><strong>What is inflationary targeting?<\/strong><\/h5>\n<ul>\n<li>Inflation targeting prescribes the use of the <strong>interest rate<\/strong> to target inflation. Whereas other methods to control inflation targets money-supply (<strong>monetarist approach<\/strong>). For example, <strong>Open Market operations.<\/strong><\/li>\n<li>Some suggest <strong>inflationary targeting<\/strong> is more effective than the <strong>monetarist approach<\/strong>, as the policy interest rate, is under the direct control of the central bank.<\/li>\n<\/ul>\n<h5><strong>What are the issues in Inflation targeting?<\/strong><\/h5>\n<p><strong>First, <\/strong>inflation targeting is not statistically validated for Indian data.<\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>The model of Inflation targeting is based on the assumption that inflation means overheating the economy. i.e., increased output greater than natural level output.<\/li>\n<li>So, the Central bank will recommend raising the rate of interest (repo rate). This will eventually reduce the money supply in the economy and normalize economic activity, thereby achieving a reduction in inflation levels.<\/li>\n<li>However, it is impossible to observe the level of output in an economy. Hence, setting policy rates based on the assumption that the economy has overheated is unscientific.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Second, <\/strong>the belief that RBI can successfully control inflation using Inflation targeting is not completely true. Consider the following examples,<\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li><strong>First<\/strong>, RBI data on household expectations showed that inflation will remain well above 6% up to 2020.<\/li>\n<li>However, inflation had fallen steadily since 2011-12, halving by 2015-16. During this period inflation targeting was not introduced. So, this explains that there are other factors that control inflation.<\/li>\n<li><strong>Second<\/strong>, during lockdown food inflation peaked even when the inflationary targeting mechanism was in force. It was mainly due to supply chain disruption during the lockdown.<\/li>\n<li>Also, the lockdown period witnessed a contraction in growth but coincided with inflation. This is against the core principle of inflation targeting that inflation denotes overheating economy.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><strong>Third,<\/strong> if the inflation in India has been controlled via inflation targeting in the past five years, it would have benefitted growth, exports, non-performing assets (NPAs) of commercial banks, and employment.\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li><strong>However, the result has not been on the expected lines. <\/strong>Only<strong>, <\/strong>private investment has declined as higher interest rates contributed to a declining private investment rate.<\/li>\n<li><strong>Other factors employment and exports are declining steadily.<\/strong><\/li>\n<li>Also, NPA\u2019s are increasing since 2016. The cases of IL&amp;FS, PMC Bank, PNB and YES Bank suggest that poor management and maladministration in the financial sector can escape RBI scrutiny as they tend to focus more on inflation targeting.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>Source: <a href=\"https:\/\/epaper.thehindu.com\/Home\/ShareArticle?OrgId=G2U8CSU3H.1&amp;imageview=0\">The Hindu<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Synopsis: Inflation control will always be relevant. But there is no conclusive evidence that the policy of inflation targeting has worked in India. Background The RBI was tasked with a mandate of the inflation target of 4 percent with a 2% deviation either way in June 2016. This agreement between the centre and the RBI&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/relevance-of-inflation-targeting-in-india\/\">Continue reading <span class=\"screen-reader-text\">Relevance of Inflation Targeting in India<\/span><\/a><\/p>\n","protected":false},"author":10316,"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":[1283],"class_list":["post-96234","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-eco_1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":1700788841,"cached_date":1704749630},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/96234","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\/10316"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=96234"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/96234\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=96234"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=96234"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=96234"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}