Recent Evidence on Flexible Inflation Targeting in India

The purpose of this paper is to analyze the movements of some macroeconomics factors and indices in India since the adoption of flexible inflation targeting. The paper begins with studying the evolution of India's monetary policy framework since the inception of RBI. The revision of the Reserve Bank of India Act in May 2016, paved the way for implementation of flexible inflation targeting framework in India. As flexible inflation targeting (FIT) is a new concept in India, we don’t have much empirical data to work with. The analysis highlights that the decision of flexible inflation targeting in India was flourishing until the last quarter of 2016. Since the first quarter of 2017, demonetization and implementation of GST have had an impact on CPI. In this context, the Indian experience with flexible inflation targeting is examined and implications are drawn, using graphical analysis since January 2014. The paper concludes by suggesting that the short-term inflation expectation of CPI should be targeted around 5 percent instead of 4 percent.


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Author: Prof. Chetana Asbe