Targeting Inflation Officially

For long, inflation and price rise has hurt the common man. When even essential food items cost dearly, low-income families have a hard time balancing their budgets. Now the Centre is getting serious about controlling inflation. The agreement recently signed between the Central government and the Reserve Bank is a welcome move. The RBI has been given the official target to bring down the inflation rate to 6 per cent by January next year, then further down to 4 per cent in 2016-17. To keep inflation rate within the 2-6 per cent range, the RBI Governor will have full powers to fix interest rates and use other necessary monetary tools. If inflation remains above or below the mandated range for three straight quarters, the RBI will have to explain its failure and propose how to remedy it. This may seem a heavy burden on the RBI, but the Central government will also be equally responsible to keep inflation within range. It must therefore observe fiscal discipline, or else the RBI will raise interest rates. That will make borrowing costly which will hurt the economy and also the government, as the government itself is a big borrower. So both sides will have a vested interest in following a reliable monetary policy. Of course, price spikes in intertiol oil or commodity markets or other sudden factors may make inflation control difficult. But overall, India has taken an important reform measure to target inflation, as the US, the Euro zone, Australia, South Korea and several other leading countries have done.