Enabling inflation targeting

Reports have been coming in about the finance ministry and the Reserve Bank of India (RBI) converging on the setting up of the new monetary policy framework. Based on a body of work, most recently the Financial Sector Legislative Reforms Commission and the RBI Committee chaired by its deputy governor, Urjit Patel, this essentially involves three components. First, there is the issue of specifying the target rate of inflation, achieving which will be the sole objective of monetary policy. Then, there is the institution of a monetary policy committee, a group of people with collective responsibility and accountability for policy decisions. Finally, there is the very important dimension of the enabling environment, or what other components of the system need to do to contribute to the effectiveness of targeting Stock Market Trading Tips

On the first, the key questions are who sets the rate and how this is to be determined. Typically, the target is set by the government, often as a legislated mandate to the central bank. This is sensible, because there is a potential conflict of interest in the central bank, which is responsible for achieving the target and also for setting it. However, arriving at the target itself is a more complex question. The Urjit Patel Committee report arrived at the two-six per cent range for the Consumer Price Index, based on estimates of the "threshold" rate of inflation, beyond which the risks of it spiralling out of control increase. This is a sound technical basis for setting the target, but nothing stops the government - executive or legislature - from setting a higher number. Credibility is important here and the technical justification for a target range should prevail. On the institutional dimension, a number of questions arise about how a truly independent committee that is outside the RBI and yet part of it can be set up. If the finance ministry is to both appoint members and be represented on the committee, there are genuine risks to the perception of central bank independence, which is critical to the success of inflation targeting. The bypass solution - giving the governor veto power over the committee - isn't really within the spirit of the framework Nifty Trading Tips

But, in the Indian context, by far the biggest challenge is posed by the enabling environment. The Urjit Patel Committee highlighted the importance of fiscal conditions in the success of the new framework. Containing the deficit, both in the aggregate and more pointedly through reducing subsidies, is certainly an important component of this. But perhaps the most important disruptive factor is the wide range of products and services whose prices are administered by the government. Virtually all sources of energy, many food items, rail tariffs - all of these can be held constant for long periods of time and then subjected to large increases or decreases. In this situation, headline inflation differs from "true" inflation. If the former is targeted, which is the practical thing to do, monetary policy may end up chasing the wrong target; keeping interest rates too high when the government sets administered prices artificially high and vice versa. While it should be nobody's case that controlling inflation is not the primary mandate and responsibility of the RBI, a formal inflation-targeting framework requires significant action on the part of the government to make it work. Where are the indications of that Commodity Trading Tips