Thursday, March 5, 2015

Inflation Targeting

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Inflation Targeting
Inflation is a key concern for every economy. Governments or central banks always try to keep inflation in a manageable level (low), because, the impact of inflation falls directly on the daily life of the citizens (like, high price of goods, etc.).

Some central banks explicitly declare a target to keep inflation within the limit. This explicit declaration is known as Inflation targeting. However, whether it is explicitly declared or not, every central bank tries to keep inflation in a manageable level.

Inflation targeting adopted by RBI
Recently, RBI and Union Government signed an agreement on Monetary Policy Framework to focus on flexible inflation targeting.

As per the agreement, RBI will have to maintain Consumer Price Index (CPI)-based inflation targets below 6 % by January 2016, and 4 % (+/- 2 %) from 2016-17 financial year (onwards).

With this inflation targeting, RBI will be more accountable, because if it fails to meet the inflation target set by it, then RBI will have to explain reasons to the government.

Recommended by Urjit Patel Committee
The transition from Monetary Targeting suggested by Chakravarty Committee (1988) to Inflation Targeting suggested by Dr. Urjit Patel Committee (2015) is similar to the practice adopted by central banks in developed countries.

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