Inflation Targeting and Monetary Policy in India

There seems to be a consensus that the inflation targeting framework adopted in India in 2016 has been successful in taming inflation. A comprehensive analysis of inflation targeting should be based on the impact on inflation dynamics, expectations and implications for growth. We illustrate the strong downward time-trend in India’s inflation dynamics coinciding with the inflation targeting regime. Trend inflation levels in India and other emerging market economies also suggest a downward trajectory regardless of the adoption of inflation targeting. Thefore, it is difficult to conclusively establish that adoption of inflation targeting in India led to a moderation in inflation or anchoring of inflation expectations. On expectations, there is some evidence of anchored household expectations, however, this anchoring predates the formal adoption of inflation targeting. Long-term expectations in India have remained firmly anchored since early 2000s. In terms of growth, the high real interest rates policy followed during the initial years of inflation targeting to establish credibility of IT regime adversely affected India’s growth dynamics.