ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Inflation Targeting: A Controversial Shift

An RBI focus on targeting infl ation may be neither productive nor advisable.

The Reserve Bank of India’s (RBI) Expert Committee to Revise and Strengthen the Monetary Policy Framework, also referred to as the Urjit Patel committee (after its chairman, a deputy governor of the RBI), has suggested making far-reaching changes to the monetary policy framework, the most important and controversial being the adoption of an inflation-targeting approach. The recommendations of the Urjit Patel committee on the monetary policy framework and those of the Nachiket Mor committee on financial inclusion bear a striking resemblance to some of the recommendations of the 2009 Committee on Financial Sector Reforms (constituted by the Planning Commission), which was chaired by the present RBI Governor Raghuram Rajan when he was not yet in the government or in the RBI. We may well be watching a root and branch overhaul of many aspects of the policy framework for the financial sector. Such a sweeping overhaul does need extensive discussion before it is carried out.

Other than the focus on inflation targeting, the Urjit Patel committee has been quite innovative. For example, to sterilise capital flows, it has suggested a phasing out of the existing instruments like the market stabilisation scheme (MSS) and cash management bills (CMBs) and has recommended the introduction of a remunerated standing deposit facility. While a technical analysis of the report can be carried out in the fullness of time, some broad-brush comments on inflation targeting are in order.

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