Inflation Targeting As A Monetary Policy Framework: Insights From India

Abstract

Inflation targeting as a framework for monetary policy was implemented in India in 2016. Prior to its adoption, apprehension was expressed by economists regarding its suitability for India. This research paper examines the performance of key macroeconomic factors including inflation, repo rate, GDP growth and exchange rate, post introduction of the inflation targeting regime in India. The study also throws light on other pertinent aspects such as inflation expectations, food price inflation, impact on the financial sector and the stance of the Reserve Bank of India during this time. To a large extent, the rate of inflation has been within the official target range. The volatility of the exchange rate has declined during the inflation targeting years. The repo rate is lower compared to the pre-inflation targeting era. Further, the transmission from the policy repo rate to the financial markets is better to some extent. However, the transmission to the lending rates in the banking sector has not improved. The study also reveals that the stock market has become less volatile. Regarding the long-term inflation expectations, the expectations held reasonably firm despite significant disruptions in the global and local supply chains due to Covid-19. The approach of the Reserve Bank of India during the inflation targeting system has been flexible. The central bank has given due consideration to output growth and stability, along with the main goal of maintaining low and stable inflation.