Inflation Targeting in India: A Further Assessment

Barry Eichengreen and Poonam Gupta

Margin: The Journal of Applied Economic Research, 2024, vol. 18, issue 1-2, 7-42

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 favour 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 per cent instead of the current 45.8 per cent. This would likely fall further to around 30 per cent 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. JEL Codes: E5, E52

Keywords: Inflation Targeting; Monetary Policy; India (search for similar items in EconPapers)
Date: 2024
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Working Paper: Inflation Targeting in India: A Further Assessment (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:18:y:2024:i:1-2:p:7-42

DOI: 10.1177/00252921241289522

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