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6) It is said that well- anchored inflation expectations can improve the strength of the domestic economy. Discuss in light of India’s flexible inflation targeting framework?(250 words)

Topic: Indian economy : Issues

6) It is said that well- anchored inflation expectations can improve the strength of the domestic economy. Discuss in light of India’s flexible inflation targeting framework?(250 words)

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Why this question

The article highlights the importance of selecting an apt anchor for inflation targeting which would enable the central bank and the government to have greater flexibility in dealing with growth inflation conundrum. The issue gains particular significance in the current situation where it appears that RBI and government are not seeing eye to eye on certain issues.

Key demand of the question

The question expects us to bring out what is meant by anchoring of inflation targeting, how it manifests in India’s monetary policy framework, the advantages that it has for the macroeconomy, the flexibility that it provides for resolving the growth inflation dilemma and challenges therein.

Directive word

Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.

Structure of the answer

Introduction – Explain about inflation targeting and India’s monetary policy framework which is based on flexible inflation targeting.

Body

  • Explain what is meant by well anchored inflation expectations. Explain with the help of India’s own policy
  • Discuss the advantages of having such anchors and then decide on the monetary policy. Discuss advantages and disadvantages such as
    • The inflation targeting framework put into place is expected to establish the credibility of the central bank by reducing the uncertainty about future policy actions through increased communication, transparency and predictability in the policy actions
    • improve the strength of the domestic economy to counter adverse external shocks, reduce inflation persistence and curtail the pass-through of exchange rate depreciation to domestic prices
  • Discuss the situation in India and whether our inflation expectations, anchors and targets have left scope for flexibility

Conclusion – Discuss if any changes are required in the current framework.