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Inflation Targeting in India: An Interim Assessment

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  • Eichengreen, Barry
  • Gupta, Poonam
  • Choudhary, Rishabh

Abstract

This paper provides an assessment of India’s inflation targeting regime. It shows that the Reserve Bank of India (RBI) is best characterized as a flexible inflation targeter: contrary to criticism, it does not neglect changes in the output gap when setting policy rates. The paper does not find that the RBI became more hawkish following the transition to inflation targeting; on the contrary, adjusting for inflation and the output gap, policy rates became lower, not higher. Some evidence suggests that inflation has become better anchored: increases in actual inflation excite inflation expectations less, which is indicative of improved anti-inflation credibility. The question is whether the shift to inflation targeting has enhanced the credibility of monetary policy such that the RBI is in a position to take extraordinary action in response to the COVID-19 crisis. The paper argues that the rules and understandings governing inflation targeting regimes come with escape clauses, allowing central banks to suspend their inflation targets temporarily under specific circumstances such as those provided by the COVID19 pandemic. The paper provides evidence that inflation targeting central banks were able to respond more forcefully to the COVID-19 crisis, consistent with the idea that inflation expectations were better anchored, providing more policy room for maneuver..

Suggested Citation

  • Eichengreen, Barry & Gupta, Poonam & Choudhary, Rishabh, 2021. "Inflation Targeting in India: An Interim Assessment," India Policy Forum, National Council of Applied Economic Research, vol. 17(1), pages 77-141.
    • Handle: RePEc:nca:ncaerj:v:17:y:2021:i:2021-1:p:77-141
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    Cited by:

    1. Das, Piyali & Ghate, Chetan, 2022. "Debt decomposition and the role of inflation: A security level analysis for India," Economic Modelling, Elsevier, vol. 113(C).
    2. Yu Chen & Apostolos Serletis, 2025. "Monetary Policy Strategies in Advanced and Emerging Economies," Open Economies Review, Springer, vol. 36(1), pages 1-23, February.
    3. Vaishali Garga & Rajeswari Sengupta, 2026. "Do Actions Match Words? Reassessing the Taylor Rule in an Emerging-Market Context," Working Papers 26-9, Federal Reserve Bank of Boston.
    4. Kalpana, R. & Dash, Pradyumna, 2025. "Households’ inflation perceptions, expectations, and the monetary policy in India," Journal of Asian Economics, Elsevier, vol. 101(C).
    5. Eichengreen, Barry & Park, Donghyun & Shin, Kwanho, 2021. "The shape of recovery: Implications of past experience for the duration of the COVID-19 recession," Journal of Macroeconomics, Elsevier, vol. 69(C).
    6. Poonam Gupta, 2025. "Comment on “Recent Developments in Indian Central Banking: Flying through Turbulence but Aided by Some Tailwinds”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 20(1), pages 126-127, January.
    7. Kishor, N. Kundan & Pratap, Bhanu, 2023. "The Role of Inflation Targeting in Anchoring Long-Run Inflation Expectations: Evidence from India," MPRA Paper 118951, University Library of Munich, Germany.
    8. Alex, Dony, 2021. "Anchoring of inflation expectations in large emerging economies," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    9. Yushi Xu & Baifan Chen & Jionghao Huang & Qingsha Hu & Shuning Kong, 2024. "Time–frequency connectedness between heterogeneous oil price shocks and inflation: a comparative analysis of developed and emerging economies," Economic Change and Restructuring, Springer, vol. 57(6), pages 1-42, December.
    10. Raghuvanshi, Abhay Pratap & Ahmad, Wasim, 2024. "Inflation targeting and monetary policy response in India," Journal of Asian Economics, Elsevier, vol. 95(C).
    11. Ruch,Franz Ulrich, 2021. "Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies," Policy Research Working Paper Series 9711, The World Bank.
    12. Garriga, Ana Carolina & Rodriguez, Cesar M., 2023. "Central bank independence and inflation volatility in developing countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1320-1341.
    13. Vaishali Garga & Aeimit Lakdawala & Rajeswari Sengupta, 2022. "Assessing central bank commitment to inflation targeting: Evidence from financial market expectations in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2022-017, Indira Gandhi Institute of Development Research, Mumbai, India.
    14. Pulapre Balakrishnan & M Parameswaran, 2021. "What lowered inflation in India: Monetary policy or commodity prices?," Working Papers 66, Ashoka University, Department of Economics.
    15. Pulapre Balakrishnan & M. Parameswaran, 2022. "What lowered inflation in India: monetary policy or commodity prices?," Indian Economic Review, Springer, vol. 57(1), pages 97-111, June.
    16. Partha Ray & Rakesh Mohan, 2025. "Recent Developments in Indian Central Banking: Flying through Turbulence but Aided by Some Tailwinds," Asian Economic Policy Review, Japan Center for Economic Research, vol. 20(1), pages 103-123, January.
    17. Barry Eichengreen & Poonam Gupta, 2024. "Inflation Targeting in India: A Further Assessment," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 18(1-2), pages 7-42, February.

    More about this item

    Keywords

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    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I15 - Health, Education, and Welfare - - Health - - - Health and Economic Development
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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