"Inflation Targeting" is one of the strategies available to the Central Bank of a country to conduct its monetary policy and also to use it as a structure and guideline for the same. Inflation is the Achilles heel for any Central bank and also the primary area of concern. Every Central Bank’s major goal is to contain inflation. Inflation is acceptable for an economy, but only in a favorable range. This favorable or acceptable range is taken as the base and all the monetary policies are adjusted accordingly. This process is referred to as Inflation Targeting.

The process of inflation targeting is very simple, at-least theoretically if not practically. The preliminary exercise is deciding the target inflation for the economy. Next, the Central Bank is concerned with deciding the future forecasts of inflation, comparing the forecasted inflation rate with the targeted inflation rate, the difference between the two is noted and it acts the catalyst for the changes initiated in the monetary policy by the Central Bank.

The most crucial step in this process is where the Central Bank has to define the target inflation for the future. This is a tough job as the Bank needs to consider numerous factors like the existing and the expected economic growth rate of the country, the level of liquidity in the system and also the rate of exchange.