Monday, February 10, 2014

Monetary policy analysis in an inflation targeting framework in emerging economies: The case of India

NIPFP Working Paper 131

Rudrani Bhattacharya and Ila Patnaik
February 2014


Monetary policy in India has moved towards an increasingly flexible exchange rate regime without any explicit framework for an alternative nominal anchor. The failure of monetary policy to anchor inflationary expectations of agents, coupled with negative supply shocks has kept inflation above the acceptable range of 5-5.5% for last five years in India. In this paper we present a model for policy analysis for India that provides insights in the setting of an inflation targeting framework to anchor inflationary expectations. The model offers an understanding of the extent to which various shocks, including the post-global crisis fiscal stimulus, accommodative monetary policy and ensuing decline in global demand, explain growth and inflation in India.