ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Monetary Policy Transparency under Uncertainty

The central bank's rate reduction is consistent with its infl ation targeting approach.

Many were surprised on 29 September when the Reserve Bank of India (RBI) reduced the policy repo by a hefty 50 basis points. However, a reading of the earlier policy statements and several parallel changes that the Governor of RBI, Raghuram Rajan, has been making in the monetary policy framework and operating procedures will reveal how the central bank has been consistent in its agenda ever since Rajan assumed office in September 2013.

Even while the policy framework in terms of the constitution and powers of a regular monetary policy committee is yet to be finalised in consultation with the government, a strong inflation targeting approach has got entrenched with Rajan in office. The RBI Governor strongly believed even earlier that the primary objective of a central bank was inflation control or price stability since sustainable growth could not be achieved without containing inflation. Therefore, policy rate changes are now mainly guided by how the inflation projection falls in line with targets. At least three of the previous RBI Governors, D Subbarao, Y V Reddy and Bimal Jalan, did not believe in a rigid inflation targeting framework in the Indian context and explicitly stated that it would not work in Indian conditions. They followed, instead, the multiple indicator approach from 1998 to 2013. Though inflation control has been implicit in RBI’s policy framework since its inception, Raghuram Rajan has now made it very explicit.

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