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Monetary policy in India: is something amiss?

Riccardo Cristadoro (International Economic Research and Relations Department, Bank of Italy, Rome, Italy)
Giovanni Veronese (International Economic Research and Relations Department, Bank of Italy, Rome, Italy)

Indian Growth and Development Review

ISSN: 1753-8254

Article publication date: 27 September 2011

Abstract

Purpose

Indian monetary policy performed reasonably well in the past, while both strategy and operational framework were evolving on par with domestic financial and monetary markets. The purpose of this paper is to document how this good track record came to an abrupt stop in recent years as inflation rose sharply and, more worryingly, expected inflation followed suit.

Design/methodology/approach

This paper has analytical, empirical and policy dimensions. Given the recent surge in inflation in India, as well as in inflation expectations, a discussion of the role of monetary policy is needed. This is presented by resorting to survey evidence on expectations as well as to indirect evidence inferred from the market reactions to macroeconomic news.

Findings

The authors documented the unhinging of inflation expectations in India in the aftermath of the financial crisis. The evidence gathered leads to the conclusion that both the monetary policy strategy and framework of the Reserve Bank of India would benefit from further evolution in the direction of a precisely defined and overarching objective (price stability), instead of the present multiplicity of goals, and of a well‐defined operating target, enhancing the transparency, communication and signalling effect of policy moves. The authors suggest that embracing a flexible inflation targeting approach is a possible solution.

Originality/value

This is a highly topical issue that has attracted a great deal of attention in policy discussions, both in India and in the region. Very few papers combine the analytical and empirical considerations in this topic.

Keywords

Citation

Cristadoro, R. and Veronese, G. (2011), "Monetary policy in India: is something amiss?", Indian Growth and Development Review, Vol. 4 No. 2, pp. 166-192. https://doi.org/10.1108/17538251111172069

Publisher

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Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited