Economists agree that an inflation targeting central bank is eminently desirable for an emerging economy like India but think that the monetary policy framework agreement entered into between the Reserve Bank of India and the Ministry of Finance does not fully meet the needs of the situation.

The agreement is a beginning, an attempt to give a clear numerical target to the central bank – but without placing any corresponding restrictions on fiscal spending that often contributes to inflation, they say.

Most express grave reservations about the ability of the political establishment to honour its side of the bargain – if at all there is one.

Sisyphean burden Ajit Ranade, Chief Economist, Aditya Birla Group, said the agreement is only the first step in formalising an overall framework. He criticised the present agreement for being one-sided since it is binding on the RBI, while there is no corresponding commitment from the government.  This, he said, would be tantamount to putting a Sisyphean burden on the RBI.  

Also, pointing to the lags in transmission of policy measures, which range from 3 to 6 quarters, he said holding RBI responsible for outcomes on actions taken one year ago would be impractical.  Inflation management in India must be a joint effort by both monetary and fiscal authorities, he said.

SS Tarapore, Economist and former Deputy Governor of the RBI, while commending the right of RBI to have instrument independence to tackle inflation, expressed concern on whether this would be respected.

“Increasingly the present government is going the way of the earlier government in voicing in the public domain the government's preference on the monetary policy action.

“The government must remain silent in the period before the policy,” he said.

TB Kapali, financial consultant, said the political establishment must not backslide on the commitment made to create an independent, inflation targeting central bank – a prospect that would be quite tempting when it is vulnerable to fiscal pressures. 

He said, “The average Indian politician is quite well capable of recidivism. I would have had more confidence in the arrangement if the following pre-conditions had been in place before introducing this framework. 

No RBI role in government borrowings 

Pare SLR down to the bare minimum for liquidity purposes for banks

Government to meet its funding requirements fully through market borrowings

The rupee's exchange rate to be completely market- determined. 

RBI to operate in the Govt Securities / FX markets purely from the perspective of its inflation target.”

That may well be the direction to take but it does not look like happening soon.

As economists say, there is a lot of work left to be done. In addition, a lot of pain too – if the experiences of other countries that have tried inflation targeting are anything to go by.

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