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There seems to be a consensus that the inflation targeting framework adopted in India in 2016 has been successful in taming inflation. However, the paper illustrates the strong downward time-trend in India’s inflation dynamics coinciding with the inflation targeting regime. Trend inflation levels in India and other EMEs and advanced economies also suggest a downward trajectory regardless of the adoption of inflation targeting, Further, it demonstrates the adverse impacts of errors in forecasting inflation by the Monetary Policy Committee (MPC) on India’s real policy interest rates and economic growth. It also illustrates the important role played by food prices and government’s Minimum Support Prices in determining inflation. In sum, the authors provide evidence to suggest that the inflation targeting framework may not have contributed to the moderation in inflation, but likely had an adverse impact on India’s growth due to extremely high real interest rates.
This paper is co-authored by Surjit Bhalla, Karan Bhasin, Prakash Loungani and Sriram Balasubramanian.
