Too many people still have not understood one of the central operational principles of the system of flexible monetary targeting
Indian consumer price inflation hit a low of 1.54% in June, just four months after the monetary policy committee (MPC) shifted its stance from accommodative to neutral. Many critics went to town about the incompetence of the MPC. How could a bunch of economists not see that inflation was about to collapse? The subsequent inflation trajectory has shown that the MPC was right to look past the June number. The government reported on Tuesday that inflation had quickened to 4.88%. It is likely that inflation will stay around that level in the next few months.
The point here is not whether the MPC should cut interest rates or not. It is that too many people still have not understood one of the central operational principles of the system of flexible monetary targeting—that decisions are taken with a view on future rather than past inflation. In other words, the inflation forecast is the intermediate target of monetary policy, since monetary policy operates with a lag of three or four quarters. Needed: more understanding and less angry hand-waving.
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