What are the objections to the new policy?

There are, however, some apprehensions surrounding inflation targeting, and almost all of them have to do with the fact that other economic policies may be sidelined. The RBI has taken note of this, and resealed a statement regarding its objectives for the new policy framework. It reads: 'The objective of the monetary policy framework is primarily to maintain price stability while keeping in mind the objective of growth.'

What are the challenges it will face?

One of the challenges in implementing this policy is that there are several supply side constraints that can easily derail the RBI’s plan. There are often cases where cost push inflation takes place due to a sudden rise in commodity prices, which may lead to a rise in interest rates despite low growth.

This is especially the case as in India, about 52 percent of the Consumer Price Index basket is made up of items that can be considered food or fuel, which make it difficult for the RBI to have much influence.

Also, the RBI is not advanced at collecting and updating data on a regular basis as foreign central banks, so it remains hampered in its decision-making capabilities.

Nevertheless, many empirical papers have found that, inflation targeting policies work particularly well in emerging market economies because the level and volatility of cycles decreases enormously.

Already, the credit rating agency Moody’s has said that the new policy is a ‘credit positive’ move, which will enhance the scope of the RBI’s existing monetary policy tools.

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