India is not ready for inflation targeting

by Hansi Mehrotra

15th May 2015

India is not ready for inflation targeting. The RBI’s monetary and exchange policies, under the newly adopted IT framework, have turned adverse hurting economic growth, increased the vulnerability of the Indian rupee and the financial system. Inflation has come down not because of higher rate policy but more because of a decline in food prices and international oil prices. The high interest rate and overvalued exchange rate regime have led to lower investments, lower non-oil exports, higher non-oil non-gold imports hurting domestic industry. The longer the current monetary policy is maintained, the greater is the permanence of the damage to potential output and jobs concomitant with loss of skills for the unemployed. Gold imports have increased in recent months possibly indicating it as a hedge against expected currency depreciation.

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