Flexible Inflation Targeting: Performance evaluation overlooks vital issues

Abstract


 The paper analyses some vital aspects of India’s flexible inflation targeting (FIT) regime, whose first-term performance was evaluated by the RBI in 2021. The absence of negative shocks, collapse of international commodity prices at the time of its introduction, and decelerating growth are pointed out in this article as notable contributors to achieving inflation target than the change of regime as claimed by the RBI. The success in anchoring inflation expectations is contestable in the light of their rigid persistence, association with fuel prices and upward drift with resurgence of inflation in recent times, indicating that the task remains unaccomplished. The post-FIT rise in output volatility is highlighted, raising the question if increased inflation focus contributed to slower growth. Macroeconomic stability ascribed to credibility gained under FIT is similarly shown without basis as indicated by oil-price spikes and exchange rate pressures. Overall, FIT’s performance awaits further testing, especially over different economic cycles.