......If Dr Reddy is indeed appointed chair of the Fourteenth Finance Commission, as has been recently trailed in this newspaper, it is likely that these rather severe views will find expression in the work of that body. In contrast to this forceful expression of the normative framework for fiscal policy, I do not recall his articulating any equally emphatic doctrine for monetary policy. His main lament was that in recent years Indian inflation had moved from being on average below that of other emerging markets to on average being at the top of the heap. Unkind observers might argue that this is what happens when a central bank is given unlimited discretion and is not bound by a formal commitment to the government or to Parliament. We know that both Dr Reddy and his successor have spurned inflation targeting as inappropriate for India, including its less formal version, the “low inflation goal” proposed by the Raghuram Rajan committee’s report on the financial sector. The lack of an explicit nominal anchor may also have complicated the Reserve Bank’s efforts to guide the exchange rate in an orderly way in recent weeks...........
