Will Inflation Targeting Curb The Growing Prices?

By siliconindia | Wednesday, 11 March 2015, 12:44 Hrs

BANGALORE: The central government has recently signed an agreement with the RBI to reduce inflation to less than six percent by January 2016 and four percent by March 2017. Global financial services firm Moody's lauded India for setting up a new mechanism to tame inflation through the Reserve Bank of India (RBI).

Under the new 'inflation targeting' mechanism or the Monetary Policy Framework agreement between the RBI and the government, the central bank will target to lower inflation to below 6 per cent by January 2016 and further to 4 per cent with a band of (+/-) 2 per cent in 2016-17. The RBI will have to explain the reasons if such targets are not achieved.

The credit rating agency said that the new mechanism would increase the predictability and effectiveness of the RBI's monetary policy, while the effectiveness of its monetary tools would increase because 'inflation targeting' would take into account future - rather than past - price trends.

Unchecked inflation would have a greater chance of hurting growth, the rating agency cautioned, adding that between 2011 and 2014 inflation was largely driven by food and commodity prices but it ultimately compromised growth.

Terming the initiative 'credit positive' in terms of rating, the U.S.-based credit rating agency's representative said that quantitative inflation would usher in transparency in the monetary policy and enable the stakeholders to know the drivers of the RBI's actions.

Cautioning that unchecked inflation may hurt growth, the global credit rating agency said it (inflation) was driven high by food and commodity prices from 2011 to 2014, compromising growth.