The Practice of Flexible Inflation Targeting in India – A Preliminary Assessment

Abstract

This paper examines how the new flexible inflation targeting framework has worked in practice in India, five years after it was introduced. The policy decisions taken by the Reserve Bank of India are analysed on four fronts — the trajectory of inflation, the inflation forecasting record, the voting behaviour of the monetary policy committee, and the ability to keep the weighted average call money rate within the policy corridor. These four themes represent the formal nominal anchor, the intermediate target, the central bank response function and the operating target of monetary policy. Each is a building block of the flexible inflation targeting framework. The paper then offers some suggestions on the road ahead for monetary policy practice in India, both given the experience of the past five years as well as the Covid-19 shock to the Indian economy.

 

Keywords: Flexible Inflation Targeting, Inflation Forecasting, Monetary Policy Committee

Authors Bio

Niranjan Rajadhyaksha, IDFC Institute

Dr. Niranjan Rajadhyaksha is Research Director and Senior Fellow at IDFC Institute

Prakhar Misra, Mercatus Centre

Prakhar Misra is Research Associate at the Mercatus Centre.

Published
2021-05-07