With the free fall of rupee in the aftermath of the recentTurkish crisis (it touched Rs. 70 a dollar) and widening trade deficit plus the ever-increasing non-performing assets(NPAs) of public sector banks, there has been mounting criticism that RBI has failed to fulfill its constitutional obligations in safeguarding the economy of the country. There are also questions being raised against the broad framework of macroeconomics that should have been the guiding principle of RBI’s policies. Traditionally, macroeconomic policies (i.e. monetary and fiscal policies) were supposed to try and attain internal balance viz. full employment, low inflation etc. and external balance like managing current account deficit.

One need not be an economist to come to the conclusion that monetary and fiscal policies are used to ensure full employment; and income policies and ensured inflation remained within bounds. There was now a hard choice – either you stabilise output, thereby feeding inflation further, or accept a reduced output to keep inflation in check. Since there was precious little that macro policies could do to lower unemployment level, monetary policy should be concerned with keeping prices (or the rate of inflation) down. The RBI’s monetary policy framework, that is flawed in more ways than one, tries to fix rules about the RBI’s preferred inflation rate and the policy stance it will take if it is deviated from it. 

But RBI’s inflation targetting is also getting flak. Ever since the adoption of the inflation targeting framework, the Monetary Policy Committee has been reluctant to lower interest rates because these are not warranted by India’s inflation profile. Since 2014 the world price of our crude oil imports have been low (these have started to climb recently), so the inflationary pressures have been home-grown. However, the RBI failed miserably to monitor the situation and whenever it did it was in a cavalier fashion. Same goes for the NPAs which has now crossed the Rs. 10 lakh crore mark. No doubt former RBI chief Raghuram Rajan is summoned by the Parliamentary standing committee on economic affairs on the issue.