Michael Debabrata Patra: Assessing inflation targeting

Address by Dr Michael Debabrata Patra, Deputy Governor of the Reserve Bank of India, at the RBI@90 High Level Conference "Central Banking at Crossroads", organised by the Reserve Bank of India, New Delhi, 14 October 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

The Context

Over the past three and a half decades since the formal adoption of inflation targeting (IT), it has proliferated across continents, regardless of the position of host jurisdictions in the developmental ladder. By the turn of this century, it has been increasingly embraced by emerging market economies (EMEs) so much so that they now outnumber advanced economies (AEs) as practitioners. A unique feature of IT is its operationalisation even before the development of a formal theory. The journey of IT has been tumultuous, navigating as it has the Great Moderation and 'once in a century' shocks such as the global financial crisis (GFC), the COVID-19 pandemic, and persisting geopolitical conflicts that have had a direct bearing on both inflation's evolution and on financial conditions. Yet, there is no evidence of any major country abandoning it. On the other hand, central banks have drawn lessons from these humungous challenges and innovated and refined their policy frameworks. The endogenous evolution of IT has rendered it the longest surviving monetary policy framework in modern times.

Three pillars of the framework – flexibility; transparency and, therefore, accountability; and credibility – have enabled IT to stand the test of time. Empirical evidence suggests that the post-pandemic price shocks have actually had relatively short-lived effects in comparison with the persistence of the price shocks of the 1970s on the wider acceptance that monetary policy will do whatever it takes. The effectiveness of inflation targeting is also found to be underpinned by its institutional quality, reinforcing pre-pandemic evidence pointing to IT being a better absorber of shocks than other regimes. The taming of the post-pandemic surge in inflation down to its last lap provides further validation of the framework. Everywhere, long-term inflation expectations remain broadly anchored in spite of heightened uncertainty.