RBI Should Not Give up on inflation

Context: Calls have arisen to abandon the use of monetary policy to control price levels, While these arguments do have some merit, we must let Reserve Bank of India do its job of keeping the rupee’s value stable

Arguments favouring inflation targeting: Introduction of Inflation Targeting regime was beneficial because - 

• RBI can do its core job as guardian of the rupee’s value.
• Acts as a solution to rising price seen before 2016.
• Help to control fiscal profligacy by the government.
• Grants stability to the currency.

Critics of Inflation targeting

•  The lending rate cannot always be used as a lever to control inflation:

• Price spikes in India are caused mainly due to supply disruptions rather than demand issues.

• Our farm sector responds too weakly to signals of demand. 
• Given such structural rigidities, a credit squeeze to combat inflation could simply dampen business impulses.

• It may lead to stagflation: Even a flexible regime with a wide inflation band was far too rigid to foster growth. 

Way Forward: Working with the inflation targeting nevertheless becomes a necessity - 

• Linking of cheaper or dearer loans with retail prices deserves a chance to prove itself.

• Huge Government Spending needed with inflation targeting: Since extra debt burden taken on due to huge spending might anyway have to be inflated away.