Inflation targeting: Why modifying the approach may be counterproductive

The current inflation-targeting regime should be suitably updated, but it should remain the framework for India's monetary policy for the foreseeable future

India adopted inflation targeting (IT) in September 2016. The government announced a 4 per cent consumer price index (CPI) headline inflation target, within an upper limit of 6 per cent and a lower limit of 2 per cent. The inflation target and band are revisited every five years. The government constituted a six-member Monetary Policy Committee (MPC), consisting of three ex-officio members from the Reserve Bank of India and three external members. The first MPC completed its term four years ago, and in September this year, a second MPC will complete its term.

For the most part,