MUMBAI: India has formally adopted inflation targeting, a historic monetary policy overhaul that marks a victory for Reserve Bank of India Governor Raguram Rajan, as the government makes subduing chronically volatile prices a priority.

In a document dated Feb 20 but published on the ministry website on Monday, the government and the central bank agreed to set a consumer inflation target of 4 per cent, with a band of plus or minus 2 percentage points, from the financial year ending in March 2017.

Rajan, an academic and former International Monetary Fund (IMF) chief economist who took the reins at the RBI in 2013, has championed the move to inflation targeting, increasingly popular among emerging market economies which typically struggle to contain price rises that hurt their poorest citizens.

Monday’s document showed the move — the most significant change in monetary policy since India opened its economy more than two decades ago — had the support of Prime Minister Narendra Modi’s government. That will be critical, given India’s inflation woes cannot be fixed by monetary policy alone.

Published in Dawn March 3rd , 2015

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