Economics Demystified

With current CPI inflation target of 4% due for review in March 2021, there is a growing clamour to scrap the current “Flexible Inflation Targeting (FIT)” regime. Nonetheless, instead of a sole mandate of retail Inflation as nominal anchor of monetary policy, some dual mandate seems worth considering, where along with CPI headline Inflation, some other anchors such as core inflation, nominal GDP or employment can be included. Going forward, strong monetary policy transmission, institutional capacity to forecast inflation using sophisticated econometric models and independent monetary policy without fiscal dominance are perquisites for an effective FIT regime. Inflation hurts everyone in the country from households to firms. Even moderately high inflation is bad for economy as a whole; it erodes savings and brings uncertainty to the growth and investment climate. Keeping this in mind, Inflation targeting was adopted as the primary objective of monetary policy in 2015-16 to ensure low ...