As highlighted by recent research by the State Bank of India, India has done what many other mature nations could not do regarding inflation targets. The report provides this success to the collaborative endeavors between the government, the Reserve Bank of India (RBI), and financial institutions during the last decade, leading to better policy transmission and inflation control.
The SBI report further stresses that the success of inflation targeting in the Indian case is due to the structural interaction between the RBI, the state government, and the banking institutions in fixing the market reform. This has kept India with very little variation to its inflation targets between 2021 and 2024, in contrast with other world economies facing bigger inflation challenges.
Moreover, the deviations from inflation targets during this period were at their lowest in India, thus also showing how effective the country was in controlling inflation. This report goes further in revealing that the synchronised activities between the RBI and the central government were crucial in this aspect.
Therefore, this paper concludes that pursuing monetary and fiscal policies, especially during COVID-19, was instrumental in maintaining price stability. Several challenges used to be present in India monitory policy mechanism before opting for inflation targeting framework. These involved prolonged fiscal dominance, a huge informal economy, and someicludencies in the form of structural deficiencies of the banking sector in offering credit.
This report reveals that while core inflation is well anchored and the average inflation is less than the inflation target, the RBI has a culprit in the form of persistent food inflation. Erasing food from headline inflation was criticized, strengthening the view that headline escalation due to food prices does not affect core inflation.
Inflation targeting has been a key component of policy since its inception and is now communicated at the 4 percent level. Since it has received considerable attention, inflation has become more stable across the economy. In this way, by fixing responsibility with the aforementioned inflation target, the RBI has effectively facilitated dealing with inflation expectations.
The SBI report, therefore, underscores the soundness of India’s monetary policy framework in the backdrop of re-emerging global inflationary forces that are currently impacting developed economies such as the US and Germany.
