Inflation targeting: A long way to go
A central feature of a well-functioning monetary policy is transmission, which is ineffective in India
The Finance Bill, 2016, amended the Reserve Bank of India (RBI) Act, 1934, to define inflation targeting (IT) as the central bank’s primary objective. Passing a law by itself is not sufficient to achieve the objective. Reforms will be needed on two fronts to build institutional capabilities that will add up to a working IT system. These involve (i) changes in the working of the central bank, including, releasing better and more frequent macroeconomic data, analysis and inflation forecasts in a timely manner; constituting the monetary policy committee and putting in place an operating procedure; letting the currency float and liberalizing the capital account; (ii) changes in monetary policy transmission, through financial market reforms.