Time for a different monetary policy target

While monetary policy framework can still retain headline as target, the actual policy should be made on the basis of signals coming from headline excluding vegetables

- SHAILENDRA JHINGAN

THE RESERVE BANK of India's (RBI) flexible inflation targeting (FIT) framework is due for a revision. India has been a recent entrant to inflation targeting (2016) although the framework has been around since 1990 with New Zealand being the first country to implement it. Today, there are 45 countries that are targeting inflation in one form or another. Despite being a late entrant, India has seen a considerable success in inflation management post-FIT with monetary and fiscal policy co-ordination ensuring inflation is far better behaved now than before.

In a country like India with a high weightage of food items (46%), the government is an important stakeholder in inflation management as the quantum of supply often becomes more important in food price management. That is why some commentators have argued that core inflation is a better metric since it responds to monetary policy signals whereas food prices often oscillate merely because of supply-side dynamics. However, with less than half the weightage in the overall consumer price index (CPI) basket, core CPI excludes more than it includes. The RBI needs a more inclusive target which also responds to monetary policy and not just supply dynamics of volatile food items.