Chapter 17: How to Fulfill the Objectives of Control of Money Supply, Growth, and Inflation Targeting?: A Peep into the Emerging Contour of India’s Monetary Policy

The term monetary policy refers to actions taken by central banks (The Reserve Bank of India (RBI) in the Indian case) to affect the monetary and other financial conditions in pursuit of the broader objectives of sustainable growth of real output, high employment, and a reasonable degree of price stability. In India, the broad objectives of monetary policy have been – to maintain a reasonable degree of price stability and to help accelerate in the rate of economic growth. The emphasis as between the two objectives has changed from year to year, depending upon the conditions prevailing in that year and in the previous year. The choice of dominant objective arises essentially because of the multiplicity of objectives and the inherent conflicts among such objectives. In this backdrop, the author brings in a “Modified Impossible Trinity” (Fig. 1) and the question is can we bypass this trinity? In other words, can we achieve these conflicting objectives of economic growth and inflation targeting without laying our hands on the autonomy of the central bank. So one way of reconciling the conflicting objectives of price stability and economic growth is through estimating the “threshold level of inflation,” a level beyond which costs of inflation begin to rise steeply on account of money supply growth and affect economic growth. Below and around this threshold level of inflation, there is greater maneuverability for the policymakers to make an attempt at pushing up growth without asking the central bank to sacrifice its autonomous stand.