Inflation, the right target
The central bank has to be given the operational freedom to pursue the target in the best possible manner
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The Narendra Modi government has done well to lock in a legal inflation target of 4% for the next five years.
That is in tune with the agreement it signed with the Reserve Bank of India earlier this year. Now, the central bank has to be given the operational freedom to pursue the target in the best possible manner.
There were fears that the government would settle for a higher target in a bid to give a cyclical boost to the economy.
Such a temporary push always seems attractive, but it not only dents the credibility of the monetary policy but also damages economic growth over the long run.
What India needs is structural reform, rather than temporary stimulus.
There are two additional issues.
First, we hope the government continues to stay on the path of fiscal discipline that it has done so well to pursue till now.
Second, it needs to put in place a monetary policy committee before Reserve Bank governor Raghuram Rajan leaves in early September.