Is India Ready for Inflation Targeting?

Sen Gupta Abhijit () and Rajeswari Sengupta
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Sen Gupta Abhijit: Economist, India Resident Mission, Asian Development Bank, New Delhi, India

Global Economy Journal, 2016, vol. 16, issue 3, 479-509

Abstract: In this paper we analyze the extent to which the current macroeconomic environment in India is suitable for implementation of inflation targeting as a monetary policy strategy, in light of the recommendation of the Urjit Patel Committee Report. Our results indicate that historically the Reserve Bank of India has given more importance to inflation compared to output growth and exchange rate changes in its monetary policy conduct and that in recent times there has been an increased emphasis on monetary independence thereby comfortably placing the RBI on a path to move towards inflation targeting. However we also find factors, that are traditionally outside the control of monetary policy, do exert a strong impact on aggregate prices in India thereby making the choice of nominal anchor a tricky one. Furthermore, the success of monetary policy in containing inflation is found to be crucially contingent on an appropriate fiscal policy as well.

Keywords: Taylor rule; inflation targeting; fiscal dominance; trilemma (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1515/gej-2015-0049

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