India has demonstrated a largely successful inflation targeting regime compared to advanced economies such as the USA, Germany, and France, according to a research report by the State Bank of India (SBI).
The report credits government initiatives, the RBI, and banks for addressing these issues over the past decade, allowing for better policy transmission and improved inflation management.
"The success of Inflation Targeting in India is largely a byproduct of a vibrant financial ecosystem where RBI, Government and the Banks are working closely in unison in ushering in market reforms" said the report
The report highlighted that India experienced minimal deviations from its inflation targets between 2021 and 2024, setting it apart from other global economies facing greater inflationary challenges.
It added that during 2021-2024, India recorded one of the lowest deviations from its inflation targets, highlighting the effectiveness of its inflation control measures. This success, the report points out, is largely a result of coordinated efforts between the Reserve Bank of India (RBI) and the central government.
"India had a largely successful inflation targeting regime. Compared to advanced economies like the USA, Germany" said the report.
As per the report the synchronization of monetary and fiscal policies, particularly during the pandemic, played a key role in maintaining price stability.
It also emphasized that India's pre-inflation targeting regime faced several challenges that hindered the effective transmission of monetary policy. These challenges included sustained fiscal dominance, the presence of a large informal sector, significant informal financing, and inefficiencies in how banks priced their loan products.
"Effectiveness of monetary policy in India's pre-Inflation Targeting regime was constrained by several India specific factors that affected transmission of the policy impulses through the interest rate channel" the report added.
However, one of the key arguments in the report is that the RBI's inflation targeting has anchored inflationary expectations, even as food inflation remains high. The notion that headline inflation should exclude food prices was dismissed as counterfactual by the ..
According to the study, the RBI's success in targeting inflation, despite food price volatility, has prevented a spill-over from food inflation to core inflation.
The report stressed that the RBI's consistent communication of its inflation target--set at 4 per cent--has been crucial in successfully anchoring inflation expectations. By reinforcing its commitment to this target, the RBI has helped stabilize inflationary trends across the broader economy.
The SBI report reinforces India's effective monetary policy framework, particularly in light of the global inflationary pressures seen in advanced economies like the US and Germany.
Source Name : Economic times