This was an overnight 7  devaluation of the basic exchange rate by 120 per cent! The rupee was then allowed to float under a managed exchange rate regime. Accordingly, compared to the end 1976 exchange rate of Rs. 8.83 per US dollar, the exchange rate was recorded at Rs. 15.56 at end 1977. This sharp devaluation addressed the overvaluation of the rupee observed under the fixed regime. The subsequent managed exchange rate regime allowed some flexibility to determine the value of currency largely on the basis of market demand and supply, while attempting to prevent the overvaluation of the rupee by maintaining the real value of the rupee against movements of a basket of major currencies. The Aftermath of the Managed Float The introduction of the managed floating exchange rate was a welcome move from the perspective of a liberal macroeconomist. However, this resulted in new challenges to the conduct of monetary policy, particularly as the exchange rate was no longer available to anchor inflation expectations like in the past. The Central Bank also had to face a new challenge, as the government started to run extremely large fiscal deficits funded mainly by concessional external funding to develop public infrastructure such as the accelerated Mahaweli scheme. Annual fiscal deficits averaged 13.3 per cent of GDP between 1978 and 1983, External current account deficits averaged 10.8 per cent of GDP between 1979 and 1983. Year-on-year inflation averaged 15.6 per cent during February 1978 and January 1985, with a peak of 32.5 per cent in August 1980.
Australia has an inflation target of 2-3 per cent, and in New Zealand it is 1-3 per cent. Within emerging market and developing economies, the targets are slightly higher. The Philippines and Chile target 2-4 per cent, Indonesia 2.5-4.5 per cent, Brazil 4.5 per cent, South Africa 3-6 per cent, while India targets 2-6 per cent of inflation. It must be noted here that a central bank could only effectively control demand driven inflation. Central banks could do little to address short-term disruptions to prices due to adverse domestic supply developments or unexpected international commodity price movements. However, central bank responses will be required to contain demand driven inflation, usually identified by movements in core inflation indices. 3  Monetary Policy Frameworks In order to maintain low and stable, single digit inflation, central banks around the world are entrusted with the task of conducting monetary policy with varying degrees of independence. Central banks use various monetary policy frameworks, as there needs to be a mechanism to operationalise the achievement of the end objective of price stability using the policy tools given to central banks to fulfil this task. Monetary policy frameworks differ across countries depending on country-specific circumstances such as the level of financial market sophistication, openness of the economy, strengths, capacities and independence of institutions, etc. For example, monetary policy frameworks in some countries are based on currency board arrangements where the value of domestic currency is strictly pegged to an international currency.