 "ILLUSTRATION: BINAY SINHA")
A foundational principle in international economics is the “impossible trinity” or “trilemma.” This asserts that a country cannot simultaneously maintain a stable exchange rate, allow full capital mobility, and pursue an independent monetary policy.
Putting inflation first: The January 2014 report of the Urjit Patel Committee shaped India’s monetary policy framework. The report recognised the trilemma and recommended giving precedence to flexible inflation targeting. It then emphasised the importance of allowing flexibility in exchange rate determination, while managing volatility through a combination of capital flow management (CFM) and macroprudential tools.
The report concluded that although international policy consensus was shifting
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