Efficacy of Monetary Policy Transmission During the Flexible Inflation Targeting Regime in India

Abstract

This article builds a Structural Vector Autoregressive model and employs non-recursive identification restrictions to examine the effectiveness of the Monetary policy transmission mechanism in India during the Flexible Inflation Targeting regime (2016–2023). The results indicate that policy rate shocks have a significant negative impact on domestic output and prices during this regime. The findings further, reveal evidence of an exchange rate puzzle during the Flexible Inflation Targeting regime. Our results give credence to the RBI’s move towards a Flexible indicator targeting approach as all the macroeconomic variables of interest, that is, Domestic output and inflation produce plausible estimates in response to a monetary policy shock. JEL Classification: C32, E52, E5, E52, F41