Comment on “Indian Monetary Policy in the Time of Inflation Targeting and Demonetization”

• DOI: http://doi.org/10.1111/aepr.12243
• Author: Takatoshi Ito
• Date: 01 January 2019
• Published date: 01 January 2019

Comment on “Indian Monetary Policy in the

Time of Inflation Targeting and

Demonetization”

Takatoshi ITO†

Columbia University

JEL codes: E52, E58, O53

Accepted: 20 August 2018

Mohan and Ray (2018) describe and evaluate Indian monetary policy from 2008 to

2017. One of the major events during this period was India’s adoption of a flexible

inflation targeting (FIT) framework in 2015. Mohan and Ray, however, are skeptical

about the virtue of FIT in India. I will argue against their skepticism.

Mohan and Ray (2018) argue that India’s monetary policy with a “multiple indica-

tors approach”was working well from mid-1990s to 2009, but that monetary policy

between 2009 and 2013 allowed consumer price index inflation rate to rise to a

double-digit level. It was likely that the stimulus to avoid spillovers from the Great

Recession was overdone. The high inflation episode induced an interest in FIT among

some policy-makers in the government and academics, but not in the Reserve Bank of

India (RBI) according to Mohan and Ray.

The movement toward FIT started in 2013 when the Report of the Committee on

Financial Sector Reforms chaired by Raghuram Rajan recommended its adoption. At

that time, the RBI was not enthusiastic about FIT: First, India had moderate inflation,

with the 2009–2013 period being viewed as an exception. Second, inflation targeting

requires an efficient monetary transmission mechanism and efficient financial markets

without interest rate distortions, which India did not have. Third, inflation pressure

came mostly from energy and food. Targeting a core inflation rate in a low-income

country would not have much relevance to the standard of living.

In September 2003, Rajan became Governor of the RBI and steered the Bank

toward accepting inflation targeting. He immediately asked Deputy Governor Patel to

form a panel to come up with suggestions to strengthen the monetary policy frame-

work. The Patel Committee submitted its report in January 2014, recommending infla-

tion be used as a nominal anchor. It took more than 1 year, but the Government of

India and the RBI signed the Monetary Policy Framework Agreement in February

2015 –this is the formal adoption of FIT in India. It contained the target of bringing

down the inflation rate to below 6% by January 2016; below 4% for fiscal year

†Correspondence: Takatoshi Ito, School of International and Public Affairs, Columbia Univer-

sity, New York, NY 10027, USA. Email: ti2164@columbia.edu

© 2018 Japan Center for Economic Research 93

doi: 10.1111/aepr.12243 Asian Economic Policy Review (2019) 14, 93–94