Inflationary Targeting in India: Replace, Rejig, or Reaffirm Targeting?

In September 2024, the governor of India’s central bank was reading a newspaper article that criticized the current monetary policy, the Flexible Inflation Targeting framework. The article questioned the appropriateness and effectiveness of the framework and was calling for a return to the previous multiple-indicators approach. Since its implementation in 2016, the Flexible Inflation Targeting framework was focused on price stability as the primary goal of monetary policy, with the Consumer Price Index combined as the nominal anchor and with the Monetary Policy Committee being responsible for setting policy rates to achieve a specific inflation target. Expert opinions were divided on the optimal monetary policy framework but the governor had to evaluate all options and make a decision. He could replace the framework with the previous multiple-indicators approach, “rejig” (or modify) the current framework by adjusting metrics or target values, or continue pursuing the Flexible Inflation Targeting framework. Which option would best achieve the central bank’s monetary goals and manage the trade-off between growth and inflation in the pursuit of price stability?