Monetary policy in India: The Long road to inflation targeting

Rajeswari Sengupta

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: This paper traces the evolution of monetary policy in India and the institutional, intellectual, and macroeconomic forces that culminated in the adoption of flexible inflation targeting (FIT) in 2015. It documents the transition from a regime of fiscal dominance and quantitative controls to a market-based, interest rate-driven framework, highlighting key reforms in financial markets, liquidity management, and central bank autonomy. The paper shows how persistent inflation in the post-Global Financial Crisis period exposed the limitations of the Multiple Indicator Approach and created the conditions for a shift toward a rule-based framework with a clear nominal anchor. It also evaluates the post-FIT experience, noting improvements in inflation outcomes, expectations anchoring, and policy transparency, while emphasizing continuing constraints from fiscal dominance, and exchange rate management.

Keywords: Inflation targeting; Monetary policy framework; Central Bank credibility; Inflation expectations; Emerging economies (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 E58 E61 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2026-04
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2026-005

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