The flexible inflation targeting framework jointly put out by the Reserve Bank of India and the Finance Ministry is “credit positive” for India, global rating agency Moody’s has said.
This is because quantitative inflation targeting will foster transparency and predictability in monetary policy, as capital market participants, businesses and the public understand the drivers of central bank actions.
In addition, the forward-looking nature of inflation targeting will encourage a focus on future, rather than past price trends.
All of this will anchor inflationary expectations and increase the effectiveness of monetary policy tools in achieving their desired results.
An increase in monetary policy transparency and effectiveness will likely lessen volatility in international capital flows into India.
Additionally, inflation targeting will support institutional strengthening via accountability, according to Moody’s credit outlook.
On Monday, the RBI made public an agreement with the Finance Ministry that mandates the central bank to bring inflation below 6 per cent by January 2016, and 4 per cent (plus or minus 2 per cent) in the following years.
India currently has a Ba3 rating with stable outlook.
In the past decade, India’s inflation was higher and more volatile than in several comparable economies. Persistent inflation lowers international competitiveness, erodes consumer purchasing power and raises the domestic cost of capital, Moody’s has said.