Inflation Targeting as Policy Option for India

Inflation targeting may have its benefits but the timing of India's ongoing transition to IT - an adverse domestic and global macroeconomic context - poses signifi cant risks to a successful implementation. [...]the evidence of IT having a positive impact comes from the pre-financial crisis era; more recent studies of the emerging market economies over a longer period show the non-IT countries growing faster than those which have adopted IT. A short-run trade-off in which higher growth can be obtained at the cost of higher infl ation may exist but the two are independent in the long run; there- fore, central banks should focus on what they can infl uence, viz, infl ation. Because a short-term infl ation-growth trade-off may tempt a central bank to occasionally favour growth (principle of dynamic inconsist- ency, Kydland and Prescott 1977), an IT regime seeks institutional structures binding central banks to commit to a low infl ation target acceptable to the public. [...]this article will only evaluate the implications of an increased infl ation focus, the shift from producer to consumer price infl ation for monetary policy setting, and the peculiari- ties of the structural, fi scal and institu- tional backgrounds. Under this approach, a number of quantity variables such as money, credit, output, trade, capital fl ows and fi scal position as well as rate variables such as rates of return in different markets, infl ation rate and exchange rate are analysed for drawing monetary policy perspec- tives. Since the 2000s, these are supplemented with forward-looking indicators drawn from the RBI's surveys of industrial outlook, credit conditions, capacity utilisation, professional forecasters, infl ation expectations and con- sumer confi dence (RBI 2014: 8-9).