August 03, 2015

Inflation Targeting and the Evolution of Monetary Policy

Vivek Dehejia, writes about the Indian Financial Code in this Mint article.

 

He writes "Unfortunately, the single-minded focus of much commentary on the Monetary Policy Committee—the most controversial feature being that it will have a majority of its members appointed by the finance ministry, rather than the Reserve Bank of India (RBI)—detracts from a larger debate on the overall merits of the IFC. What is more, it is impossible to debate sensibly how the MPC will function without delving more deeply into the Monetary Policy Framework Agreement (MPFA), agreed upon in February between the finance ministry and RBI. This fulfils a promise made by finance minister Arun Jaitley in the Union budget 2013, in which he promised a “modern monetary policy framework to meet the challenge of an increasingly complex economy....

In simple terms, the MPFA mandates that RBI will target inflation in the consumer price index (CPI) at 4%, with a tolerance band of 2% around the target. If the IFC draft is accepted, it will be the MPC that will be charged with implementing the target. In thus creating an explicit inflation-targeting policy mandate for the central bank, entrusted to an MPC, India will join the ranks of modern central banks....."

 

Topic : State Capacity / In : OP-EDS
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