Inflation targeting redux

Macro Environment

 The focus of the governor seems to be slanted towards continuity.

 Even though all interest rates were left unchanged, the policy bias continues to be one of soft and flexible interest rates.

 While market expectations on rate cuts were belied, this focus on continuity is encouraging and would provide the financial markets and investors with a stable policy environment bereft of uncertainties.

 The general review of economic conditions is largely positive in nature and this is underscored by the revisions to the forecasts on GDP growth and inflation.

 With regard to inflation, the tone of the policy is more determined and even though the statement dwells on the low probability of fresh domestic inflationary pressures, the promise to closely monitor price behaviour leaving no room for complacency on the inflation front, is instructive.

 Not only does this indicate the re-emergence of inflation targeting as one of the objectives of monetary policy, it also points towards the fact that the inflation rate targeted by monetary policy is below its current level of 5 per cent.

 In all, the governor seems to have reserved the right to make changes in the policy framework at any suitable time and not necessarily restrict these to the bi-annual statements on policy.

 In doing so, the flexibility necessary for dealing with an ever - changing economic environment has been retained and may be used when warranted.