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Inflation Targeting in India: A Further Assessment

Author

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  • Barry Eichengreen

    (University of California, Berkeley)

  • Poonam Gupta

    (National Council of Applied Economic Research, Delhi)

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.

Suggested Citation

  • Barry Eichengreen & Poonam Gupta, 2024. "Inflation Targeting in India: A Further Assessment," NCAER Working Papers 174, National Council of Applied Economic Research.
  • Handle: RePEc:nca:ncaerw:174
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation Targeting; Monetary Policy; India;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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