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Inflation Targeting In India: Issues And Prospects

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  • Raghbendra Jha

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Abstract

Inflation targeting (henceforth IT) has emerged as a significant monetary policy framework in both developed and transition economies. It has been in place for a decade or more in a number of countries - with around 20 central banks adopting it as their basic monetary policy framework. 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 some pressure for such economies to adopt IT as a core element in their monetary policy frameworks. The present paper evaluates the case for IT in India. It begins with stating, almost from first principles, the objectives of monetary policy in India. I argue that inflation control cannot be an exclusive concern of monetary policy in a country such as India with a substantial poverty problem. The rationales for IT is then spelt out as are nuances of the practical implementation of IT. The paper provides some evidence on the effects of IT in developed and transition economies and argues that although IT may have been responsible for maintaining a low inflation regime it has not brought down the inflation rate substantially. Further, the volatility of exchange rate and output movements in transition countries adopting IT has been higher than in developed market economies. The paper then discusses India's experience with using rules-based policy measures (nominal targets) and elaborates on the reasons (as espoused in the extant literature) why India is not ready for IT. It is further shown that even if the Reserve Bank of India wanted to, it could not pursue IT since the short-term interest rate (the principal policy tool used to affect inflation in countries working with IT) does not have significant effects on the rate of inflation. The paper concludes by listing monetary policy options for India at the current time.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2005-28.

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Length: 51 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:een:camaaa:2005-28

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  1. Lars E.O. Svensson, 1998. "Inflation Targeting as a Monetary Policy Rule," NBER Working Papers 6790, National Bureau of Economic Research, Inc.
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  3. Philippe Cuneo & Jacques Mairesse, 1984. "Productivity and R&D at the Firm Level in French Manufacturing," NBER Chapters, in: R & D, Patents, and Productivity, pages 375-392 National Bureau of Economic Research, Inc.
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  17. Laurence Ball & Niamh Sheridan, 2003. "Does Inflation Targeting Matter?," NBER Working Papers 9577, National Bureau of Economic Research, Inc.
  18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  19. Rachel Lomax, 2005. "Inflation Targeting in Practice: Models, Forecasts, and Hunches," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(3), pages 251-265, September.
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Cited by:
  1. Muneesh Kapur & Michael Debabrata Patra, 2012. "Alternative Monetary Policy Rules for India," IMF Working Papers 12/118, International Monetary Fund.
  2. Epstein, Gerald, 2009. "Rethinking monetary and financial policy : practical suggestions for monitoring financial stability while generating employment and poverty reduction," ILO Working Papers 434439, International Labour Organization.
  3. Mishra, Ankita & Mishra, Vinod, 2012. "Evaluating inflation targeting as a monetary policy objective for India," Economic Modelling, Elsevier, vol. 29(4), pages 1053-1063.
  4. Syed Kumail Abbas Rizvi & Bushra Naqvi & Sayyid Salman Rizavi, 2012. "What Does Pakistan Have to Join the Inflation Targeters’ Club—a Royal Flush or a Seven-Deuce Offsuit?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(2), pages 35-62, July-Dec.
  5. Muneesh Kapur & Michael Debabrata Patra, 2010. "A Monetary Policy Model without Money for India," IMF Working Papers 10/183, International Monetary Fund.
  6. Takeshi Inoue & Shigeyuki Hamori, 2009. "What Explains Real and Nominal Exchange Rate Fluctuations?: Evidence from SVAR Analysis for India," Economics Bulletin, AccessEcon, vol. 29(4), pages 2803-2815.
  7. Gerald Epstein, 2009. "Rethinking Monetary and Financial Policy: Practical suggestions for monitoring financial stability while generating employment and poverty reduction," Published Studies ilo_epstein11_09, Political Economy Research Institute, University of Massachusetts at Amherst.

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