Strong and credible institutions aid a country’s growth. In pursuit of this goal, the law governing Reserve Bank of India was amended last year to introduce a framework to squarely target inflation. The amendment set up a monetary policy committee (MPC) – with some members from outside the central bank – and gave it legislative backing to function autonomously, as that is the bedrock of a credible central bank. Unfortunately, this seems to be an idea the finance ministry is not yet comfortable with.
India’s inflation targeting framework is based on the idea that it is the prerogative of an elected government to set an inflation target. Once a target is set the MPC is given the necessary autonomy to achieve this goal. In the event it fails to achieve the target, it has to provide government a formal explanation. This architecture recognises that a credible and independent central bank needs a clearly defined mandate. In other words it cannot be burdened with other objectives such as pushing up economic growth. That has to be achieved through other policy levers the government commands.
via Let RBI be: India’s macroeconomic stability depends on the credibility of its central bank
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