Is India Ready for Inflation Targeting?

Abstract

In this paper we analyze the extent to which the current macroeconomic environment in India is suitable for implementation of inflation targeting as a monetary policy strategy, in light of the recommendation of the Urjit Patel Committee Report. Our results indicate that historically the Reserve Bank of India has given more importance to inflation compared to output growth and exchange rate changes in its monetary policy conduct and that in recent times there has been an increased emphasis on monetary independence thereby comfortably placing the RBI on a path to move towards inflation targeting. However we also find factors, that are traditionally outside the control of monetary policy, do exert a strong impact on aggregate prices in India thereby making the choice of nominal anchor a tricky one. Furthermore, the success of monetary policy in containing inflation is found to be crucially contingent on an appropriate fiscal policy as well.

Fiscal deficit and inflation linkages in India: tracking the transmission channels

“…Basic problem is of interpretation when a variable in level and other variables are in growth rates. Even though interpretation is quite difficult, the relation among the variables could be statistically found irrespective of order conditions, and there are several studies like Gupta and Gupta (2014) which applied ordinary least-square regression using variables in level and first difference to obtain statistical inferences. With regard to the lag length selection, lags have been selected based on Akaike information criteria (AIC), which indicated 1 lag for analysing transmission channels 1, 3 and 4.…”

Facing the Quadrilemma: Taylor rules, intervention policy and capital controls in large emerging markets

“…In particular, the Reserve Bank of India formally states that is primary objective is to maintain price stability, while "…keeping in mind the objective of growth" and announced recently a "flexible inflation targeting" regime. 3 Empirical work has found that India alternates between an emphasis on output and inflation in pursuing domestic macroeconomic stability (Hutchison et al 2013;Gupta and Sengupta, 2014;Kaur, 2016), and maintaining orderly conditions in the foreign exchange markets as an official objective of the Reserve Bank of India (RBI) (Hutchison and Pasricha, 2016). RBI is the manager of the foreign exchange regulation act (FEMA, 2004), which also gives it the power to impose capital controls.…”

“…This series has been employed in other studies investigating monetary policy in both Brazil and India. (Kaur, 2016;Gupta and Sengupta, 2014; 5 It is an intriguing question as to why Brazil has had a much more volatile economy than India, with prime candidates more restrictive capital controls in India and, hence, less volatile capital movements; more volatile external shocks in Brazil associated with dependence on commodities and terms-of-trade fluctuations; and so on. Our focus is not in addressing this issue but to compare monetary and intervention policies in the two countries.…”

Phillips Curve Relationship in India: Evidence from State-Level Analysis

“…First, the preferred specification of Sen Gupta and Sengupta (2016) indicates an exchange rate pass-through of as high as 0.40 (i.e., a 10 per cent depreciation of the domestic currency could increase CPI inflation by 4 percentage points). Moreover, they estimate a fuel-price pass-through of almost 0.7 (i.e., a 10 per cent increase in fuel prices could increase CPI inflation by 7 percentage points), suggesting a very high second-order effect 3 .…”