Inflation targeting in India

Abstract

Inflation targeting (IT), since its inception, has been a topic of much debate for economists all around the world. In this paper, the suitability of inflation targeting for an emerging economy like India is explored, pitching it against the multi-variable approach currently being followed. One of the foremost challenges in the present context of global economic crisis is the debate whether priority should be accorded to IT or financial stability. Also, in India, there is still another dimension and that is, which of the multiple price indices would be most appropriate for fixing as an anchor of IT. Therefore, this paper also evaluates different forms of CPI, WPI and PPI in order to find which amongst them would be the best indicator of inflation in the Indian scenario. Through analysis of conditions prevalent in India, this paper justifies why inflation targeting would not be an appropriate policy for India at this juncture, and recommends certain changes in the present multi-variable approach that would make it more robust and effective.