Inflation Targeting in India: A Further Assessment

Barry Eichengreen and Poonam Gupta

No 174, NCAER Working Papers from National Council of Applied Economic Research

Abstract: We assess India’s inflation-targeting regime at the eight-year mark. The Reserve Bank of India continues to be a flexible inflation targeter: it responds to both the output gap and inflation when setting policy rates. It has become neither more hawkish nor more reactive with the transition to inflation-targeting. Evidence points to improved outcomes: inflation is lower and less volatile; inflation expectations are better anchored; and the transmission of monetary policy is more effective. Given this record, radical changes such as broadening the RBI’s monetary mandate, abandoning the target in favor of a more discretionary regime, targeting core instead of headline inflation, or altering the target and tolerance band would be risky and counterproductive. One obvious area for improvement entails updating the weight of food prices in the CPI basket. We estimate the correct weight of food at today’s per capita income to be closer to 40 percent instead of the current 45.8 percent. This would likely fall further to around 30 percent in a decade from now due to the projected increase in per capita incomes. This correction should ameliorate concerns about the design and practice of the current inflation targeting regime.

Keywords: Inflation Targeting; Monetary Policy; India (search for similar items in EconPapers)
JEL-codes: E5 E52 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2024-05-24
New Economics Papers: this item is included in nep-cba, nep-ipr, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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