As we head towards year-end, commentators will inevitably begin to assess what reforms the new government has embarked upon, and what needs to be done in the coming months. And, inevitably, discussion on the goods and services tax, coal and land policy, cash transfers will figure on everyone?s list. But, in all probability, most analysts will not include RBI?s move to inflation targeting in this list of reforms. And while this may not be surprising, it will certainly be puzzling. Because, in my view, RBI?s pivot to flexible inflation targeting in January has been perhaps the most important reform of 2014, as I explain below.

Unfortunately, it?s been a regime change that most markets participants have not fully internalised. Therefore, every two months markets live in the belief that?with growth still weak?a rate cut is just around the corner. And, every two months, RBI has to remind markets, that we live in a new world. That the main objective of the central bank is to reduce headline CPI inflation to 8% by January 2015 and 6% by January 2016 (which, in turn, cannot rule out more monetary tightening in 2015). And that other objectives, like growth, are secondary to this primary objective.

So, why this disconnect? Why have some market participants not fully appreciated the regime change? Perhaps, we human beings operate with more inertia and stasis than economic models presume. Therefore, fundamental reforms take time to be internalised. Perhaps we have lived with such elevated inflation for so long that cynicism has set in, and we refuse to believe that the inflation monster can be overcome. Both explanations reinforce the need to persist with the regime change.

But first, some context. Why was there a need to break away from RBI?s multiple indicator model and pivot decisively to inflation targeting. This is not hard to explain. CPI inflation (proxied by CPI-Industrial Workers) averaged 10.4% between 2009 and 2013. And, contrary to popular belief that this is entirely food inflation everywhere and all the time, core CPI (non-food, non-fuel) inflation averaged 9.4% during this period.

The consequences of this were not hard to fathom. Household inflation expectations have been stuck in double-digits for the last five years, real policy rates were largely negative from 2009 to 2013 (deflated by the CPI-IW), and household financial savings bled, as households rationally fled to physical assets. Consumption suffered as urban wages did not keep up with inflation and, therefore, real purchasing power was squeezed and the investment climate suffered as input costs surged, monetary tightening (which was warranted to curb inflation) squeezed growth, pricing power and margins. The rupee ratcheted down 40% between 2011 and 2014 to compensate for inflation differentials and preserve competitiveness of the tradable sector. No modern economy can experience sustained growth or macro stability if it is bedevilled with sustained, elevated inflation and the associated loss of macroeconomic stability.

Against this backdrop, a decisive move to target inflation?and making that the overwhelming priority of monetary policy?was unsurprising and inevitable. RBI indicated that it would tailor monetary policy to dis-inflate the economy to 8% CPI by January 2015 and 6% January 2016. Why the magic number of 6%? Because there is enough research to suggest that the damaging consequences to the macroeconomic environment rise disproportionately when inflation is above this level.

Also, the choice of CPI was understandable. No household in India consumes the WPI. And the WPI does not cover services, which account for more than 60% of the economy. So any move to anchor expectations had to involve the CPI. Previous regimes were unable to do so, because of a data lacuna. No all-India CPI existed. But with one coming into force from 2011 and having a few years of history, the move to CPI was now possible.

So what does this mean for monetary policy in the coming months? Quite simply, that given RBI?s target of 6% in 15 months, any monetary easing is very unlikely. Instead, RBI?s model forecast suggests in a do-nothing scenario, headline CPI will slowly drift down to 7% by the end of 2015?100 bps above the target. The implication is that more tightening cannot be ruled out, though the Governor clarified that this is not a given, and much would depend on the incoming data.

Will softening oil prices help achieve the target? RBI?s models suggest they will help but cannot do the heavy lifting. A $10 reduction in oil prices will only bring down headline inflation by 20 bps, so oil prices will have to collapse to help the disinflation meaningfully.

But how can RBI control food inflation? It certainly cannot, and this falls squarely under the domain of the government. With inflation being the number one voting issue in the general elections (as well as in the four states that went to vote last year) dis-inflation from these levels is not just good economics but, in our view, good politics. To be sure, RBI cannot control a food or oil shock. But what it can do is control the propagation mechanism and ensure the shock does not spread into a generalised inflation.

So what then happens to growth? As alluded to earlier, bringing down inflation is the best contribution RBI can make to India?s medium-term growth cause. But, in the near term, the government will have to take on the growth mantle. Our estimates suggest 40-45% of the growth slowdown over the last four years is on account of implementation bottlenecks. If reversed by the new government, it is likely that growth can accelerate back to the 6%-plus levels even if nominal rates are held at current levels.

Most of all, we are about to enter a new era. One in which the Fed will tighten rates and normalise policy. Emerging market currencies are likely to come under (potentially severe) pressure. And the economies that will get rewarded/least affected are those with the most sound fundamentals: low and stable inflation, contained fiscal and current account deficits. If investors believe RBI will give up on its fight against inflation, they will necessarily impute a much weaker rupee as being fair value, and the currency is expected to come under much more pressure. For this, and all the aforementioned reasons, RBI is likely to stick to its guns. Markets need to get used to this new reality.

Sajjid Z Chinoy is Chief India Economist for JP Morgan and served on RBI?s Expert Committee to revise and strengthen the monetary policy framework