1. Member’s Name Roll No.
Akshat Kaushik 201601112
Baljeet Kaur 201600216
Debangana 201610312
Pratik Beriwala 201611308
Rishabh Gupta 201601219
Shashank Sharma 201601329
Submitted by:- Group-7/Sec F
Submitted to:-
Dr. Tulika Sharma
Assistant Professor (Business
Communication) – General
Management &
Chairperson – Grievance Redressal
Committee (IMT-Hyderabad)
Business Communication II
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2. Topics of discussion on IT
•What is inflation targeting?
•Why IT is controversial?
•Review of Literature.
•Cross Country experiences
•Inflation Target Measure
•Why use inflation targeting?
•How to Implement Inflation Targeting
•IT in India
•What the RBI to do if the inflation target is not met?
•Determination and notification of Inflation Target
•Conclusion and Recommendations
•Biblography
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3. What is inflation
Inflation targeting is a monetary policy strategy used by central banks for
maintaining inflation at a certain level or within a specific range.
In general, central banks normally follow a policy of keeping inflation
sufficiently low. However, in inflation targeting, there is a preset, publicly
declared target. Using methods such as interest rate changes, the central bank
and other monetary authorities are expected to guide inflation to a targeted
level or range. Such a policy makes the central bank focus on a single variable
and imposes a penalty if the target is not adhered to.
This policy was initially adopted by New Zealand in 1990 although other
countries, most notably Germany, had evolved something close to inflation
targeting considerably earlier.
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4. Why inflation targeting is controversial?
A unique and at the same time a controversial feature inflation targeting is that
the central bank should sideline all other objectives to ensure that the single goal
of price stability is realized. This strategy makes the IT framework generally
unacceptable in the developing world. This is because there are two problems
while a developing country central bank adopt it.
First, fighting inflation or price stability is one important objective of the general
macroeconomic objective in fast growing developing economies. The equally
important objective is achievement faster economic growth.
Second one is that generally there is conflict or trade-off between the objective
of price stability and economic growth.
Another limitation of inflation targeting in countries like India, it neglects the
real cause of inflation – agricultural supply shocks which can’t be solved by any
monetary policy action.
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5. Review of Literature
Since its inception in 1990,(NewZeland) a considerable amount of literature on
inflation targeting (IT) has evolved. While some of these provide the modeling
details as to how to frame economic policies for IT, some others highlight the
pros and cons of IT, while the rest debate which parameters are to be considered
for IT.
Major advocates of IT reason that one of the
most important advantages of having IT is
the accountability and transparency it
brings to policy making. It helps in putting
a quantitative target, and a fixed target
horizon.
The most damaging critique is that
strictly following IT may give too much
weight to inflation stabilization, prove
detrimental to the stability of real
economy or other possible monetary-
policy objectives, hence credibility of
the policy is questioned
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6. Even in countries that follow inflation targeting, different countries define
inflation targeting in different ways, and choose different indicators to target.
Taking example:
United Kingdom defines price stability by the Government's inflation target
of 2% based on CPI announced each year in the annual Budget
Statement.(2%,1992)
New Zealand requires price stability be defined in a specific and public
contract, negotiated between the Government and the Reserve Bank, called
the Policy Targets Agreement .(2%,1990)
In Canada, monetary policy is built around flexible exchange rate and
inflation control target.(2%.1991)
Thailand, on the other hand, targets core CPI exclusive of raw food and
energy prices from headline inflation and the Monetary Policy Board (MPB)
sets the inflation target in terms of quarterly average core inflation in the
range of 1% to 4%. (1-4%,2000)
Cross-country Experiences
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8. Why Use Inflation Targeting?
•Other monetary policy regimes gave no satisfactory results, such as:
-fixed money growth rules
-fixed exchange rates
-crawling pegs
-monetary conditions index rules
Since their inception in the late 1980’s to date, no single country that adopted
inflation targeting abandoned this regime.
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9. How to Implement Inflation Targeting?
Policy must be forward looking. The central bank sets rates so as to ensure
that monetary conditions support the achievement of the inflation target. If
inflation is expected to deviate from target, policy adjustments will be
required.
To be effective, policy must be clear, transparent, and have credibility.
Multi-year targets are better than single-year ones.
The ideal setting: targets are set by the government and implemented by an
instrument-independent central bank, fiscal policy and wage policy are
compatible with the target, and a floating exchange-rate regime is in place.
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10. IT in India
Monetary policy aims to target inflation over a horizon of 2 to 3 years. Therefore,
to target inflation, it is necessary to have the capability to build an inflation
forecast. India has yet to develop skills to forecast inflation over a range of 8 to 12
quarters. In countries which follow IT, sophisticated models are used to forecast
inflation. Similarly, there is need to forecast output and its deviation from natural
rate, implying forecasting of output gap. The other issue is the target inflation
number which needs to be identified and quantified.
Major price indices in India
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11. What the RBI to do if the inflation target is
not met?
The new notification also prescribes the procedure to be followed by the RBI
if the target is missed. “Where RBI fails to meet the inflation target, it shall set
out a report to the Central Government stating the reasons for failure to
achieve the inflation target; remedial actions proposed to be taken by RBI;
and an estimate of the time-period within which the inflation target shall be
achieved pursuant to timely implementation of proposed remedial actions
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12. Determination and notification of Inflation Target
In exercise of the powers conferred under the Reserve Bank of India Act, 1934,
the Central Government, in consultation with RBI, has fixed the inflation target
for the period beginning from August 5, 2016 and ending on the March 31,
2021, as under:
Inflation Target: Four per cent
Upper tolerance level: Six per cent
Lower tolerance level: Two per cent
While setting the above target, the government elaborated that inflation targeting
in India will consider the growth dimensions also. “The key advantage of a
range around a target is that it allows MPC to recognise the short run trade-offs
between inflation and growth but enables it to pursue the inflation target in long
run over the course of business cycle.”
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13. Conclusions and Recommendations
Various economists, both Indian and otherwise, have presented their views on
inflation targeting. It is widely accepted that adoption of IT has helped most
countries reduce their inflation rates successfully.
Also, it helps increase the transparency and credibility of the central bank, thus
allowing it to carry out its monetary policy with greater effectiveness. IT
provides a nominal anchor, and helps to stabilize inflationary expectations in an
uncertain future. Also, for some nations, exchange rate volatility has also
declined as a result of IT implementation.
But on the other hand, IT demands a number of pre-conditions for its successful
implementation such as independence of central banks, well developed financial
markets, flexible exchange rate, etc. Most emerging economies, including India,
lack these conditions. Besides, RBI has objectives to take care of other
parameters like economic growth, stable exchange rate and financial stability,
and cannot restrict itself to the single objective of inflation.
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