Does Monetary Policy in India Anchor Inflation Expectation?

Rudrani Bhattacharya ()
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Rudrani Bhattacharya: National Institute of Public Finance and Policy

Working Papers from National Institute of Public Finance and Policy

Abstract: India has entered into the Inflation Targeting (IT) monetary policy regime in 2015. Under this rule-based monetary policy regime, changes in the policy rate transmits to the economic activities and current inflation rate by altering the inflation expectation of the rational economic agents. This study empirically investigates whether monetary policy can anchor ination expectation of economic agents in India. In our analysis, the survey based measure of households' inflation expectation published by the Reserve Bank of India (RBI) captures inflation expectation of private agents. Using a co-integrated Vector Auto Regression (VAR) model, we find moderate but significant monetary policy transmission in India via interest rate channel. However, inflation expectation seems to be unanchored by monetary policy conduct in the country. Our finding is found to be robust under alternative modeling frameworks.

Keywords: Inflation expectation; Monetary policy; Co-integrated VAR; India (search for similar items in EconPapers)
JEL-codes: C32 C5 E31 E52 E58 (search for similar items in EconPapers)
Pages: 26
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Note: Working Paper 395, 2023
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