Do you agree with the view that the flexible inflation targeting framework adopted by the Reserve Bank of India has worked modestly in the normal times but put limits on the RBI’s capability in the times of severe growth shock scenario? 10 marks

Mentor’s comment-

  • https://indianexpress.com/article/opinion/columns/reserve-bank-of-india-flexible-inflation-economy-coronavirus-monetary-policy-committee-6708680/
  • In the body, mention briefly the inflation-targeting framework.
  • In the body discuss in detail how inflation targeting mechanism has been successful to maintain the inflation in limits. Next mention the issues with the mechanism like adopting of CPI instead of WPI as an anchor. Inability to close the gap between inflation expectation and real inflation. At last mention the restriction the mechanism put in case of shocks like the one induced by the corona pandemic which saw declining growth and high inflation.
  • Conclude by mentioning the need for the RBI to remain active and with a host of unconventional measures, which will likely include more proactive bond purchases to ensure that market interest rates do not rise significantly due to fiscal and market borrowing-related concerns.
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Samiksha Tiwari
Samiksha Tiwari
1 year ago