This document discusses macroeconomic topics such as inflation targeting, Taylor's rule, and the Reserve Bank of India's monetary policy review. It provides details on India's current inflation rate and GDP growth projections. It then explains flexible inflation targeting, which aims to stabilize both inflation around a target rate and the real economy. Some challenges of flexible inflation targeting are also outlined. The document discusses nominal GDP targeting as an alternative to inflation targeting for developing countries like India that are more susceptible to supply and trade shocks. It considers some remaining questions around implementing nominal GDP targeting in India.

1. Macroeconomics
Inflation targeting and interest rate rules

2. Liquidity Adjustment Facility

3. TAYLOR’S RULE
• Constants are assumed to be 0.5
• Target inflation(Consumer): 5%
• Potential GDP measurement: Hordrick – Prescott

5. RBI’S MONETARY POLICY REVIEW
OPEC:
Crude oil
price at $68
Current CPI of
October: 5.52%
Forecast of
March 2015: 6%
Long Target
inflation: 5%
Current GDP of
Q2: 5.3%
Growth projection:
5.5%
IMF forecast of
potential GDP:
6.75-7.0%
Other factors affecting decision
Int – Inv –
AD – Y 
Inflation expectation
elevated,
Forecasted lower
Kharif o/p,
Depreciation of
rupee to 62.03
PMI index by
HBSC at peak:
53.1

6. FLEXIBLE INFLATION TARGETING
 Aims at stabilizing both inflation(around it’s target) and the real economy
 Primarily concerned with factors like
 stability of interest rates
 exchange rates
 output
 Employment
 stabilizing resource utilization around a normal level
 How quickly the central bank tries to bring inflation back to the targeted rate after
a deviation
 Urjit Patel Committee Report points out moving towards a flexible inflation
targeting regime:
 Anchors inflation expectations
 Benefits including fiscal stability and low output volatility
 Improves overall macroeconomic stability
 Enhances growth prospects in the medium run
 Allows the inflation to deviate from the target in the short run to
accommodate growth concerns.

7. CONTD…
Challenges:
 Managing the impossible trinity
 Inflation metric to use as a target
 Appropriateness of the numerical target
 Impact of fiscal dominance
 Absence of well-developed capital markets and accurate forecasting
techniques
 Difficulties lies in defining and estimating the relevant measure of
“potential output”
 Reduce the credibility of the inflation target.

8. NOMINAL GDP TARGETING IN INDIA
– AN ALTERNATIVE TO INFLATION TARGETING
 Long-standing debate on the benefits and costs involved in
inflation targeting
 Revived interest in NGDP targeting, as an alternative to
inflation targeting
 Focused on advanced economies such as the US, Euro and
Japan where interest rates are ‘zero lower bound’
 Developing countries have more acute need of monetary
policy credibility
 Announcing a strict inflation target that is then repeatedly
missed would tend to erode credibility
 Developing countries are more susceptible to adverse supply
shocks and trade shocks and thus can benefit most from an
NGDP target

9. EFFECT OF SHOCKS ON DIFFERENT TARGETING & INDIA’S POSITION

10. QUESTIONS YET TO BE ANSWERED -
 Monetary authorities may not be able to hit the target, even if
a new target is set on an annual basis just like Inflation targets
 The central banks cannot target an economic statistics that is
regularly revised
 The McCallum Taylor Rule is akin to the NGDP targeting i.e. it
may already be a part of India’s policy setting
Thank You