Why inflation targeting works
In absence of a specific mandate, monetary policy was often used to achieve targets unrelated to price stability
The Reserve Bank of India (RBI) officially adopted inflation targeting (IT) as a monetary policy strategy in February 2015. A few days ago, the government notified a consumer inflation target of 4% to be followed till March 2021. Some economists have expressed fresh concerns about the wisdom of adopting IT. These concerns are misplaced. Inflation hurts everyone in the country from households to firms. Even moderately high inflation is bad for growth as is inflation volatility. The primary objective of monetary policy should be to ensure low and stable inflation. IT offers a framework to achieve this objective in a credible and sustainable manner. The adoption of IT by the RBI is a significant step in the right direction. The RBI should stick to this framework and put in place the operating procedure needed to implement IT.