Inflationary Targeting in India: Replace, Rejig, or Reaffirm Targeting?

In September 2024, the governor of India’s central bank was reading a newspaper article that criticized the current monetary policy, the Flexible Inflation Targeting framework. The article questioned the appropriateness and effectiveness of the framework and was calling for a return to the previous multiple-indicators approach. Since its implementation in 2016, the Flexible Inflation Targeting framework was focused on price stability as the primary goal of monetary policy, with the Consumer Price Index combined as the nominal anchor and with the Monetary Policy Committee being responsible for setting policy rates to achieve a specific inflation target. Expert opinions were divided on the optimal monetary policy framework but the governor had to evaluate all options and make a decision. He could replace the framework with the previous multiple-indicators approach, “rejig” (or modify) the current framework by adjusting metrics or target values, or continue pursuing the Flexible Inflation Targeting framework. Which option would best achieve the central bank’s monetary goals and manage the trade-off between growth and inflation in the pursuit of price stability?

This case is suitable for macroeconomics or a business environment courses, within a module on monetary policy, in undergraduate or graduate economics programs, as well as in postgraduate MBA programs. It may also be used in monetary economics or applied macroeconomics courses at both the undergraduate and graduate levels. Students should have an understanding of macroeconomic concepts such as aggregate demand, aggregate supply, national income, and inflation. The case helps students explore the challenges that central banks face in conducting monetary policy. Through the discussion of this case, students will understand why there is growing demand in India to modify or replace aspects of the current monetary policy framework. After working through the case and assignment questions, students will be able to<ul><li>understand the key components and functioning of monetary policy frameworks;</li><li>evaluate the trade-offs that central banks face in monetary policy;</li><li>explore the challenges of the FIT framework in an emerging economy such as India; and</li><li>assess the appropriateness and effectiveness of monetary frameworks, with specific focus on the Flexible Inflation Targeting framework.</li></ul>

• Monetary Policy Frameworks
• Inflation Targeting, Sacrifice Ratio
• Multiple Indicators Framework