India's Inflation Targeting: Success and Recommendations

A new research paper underscores the effectiveness of the Reserve Bank of India's (RBI) inflation targeting regime. Authored by economists Barry Eichengreen and Poonam Gupta, the paper suggests refining the regime rather than abandoning it. It advocates reducing the weight of food-price inflation in the CPI basket to better reflect Indian households' circumstances.

A recent research paper highlights the success of the Reserve Bank of India's (RBI) inflation targeting regime and advises against abandoning it. The paper, authored by economists Barry Eichengreen and Poonam Gupta, suggests that radical changes could be risky.

The paper, titled 'Inflation Targeting In India: A Further Assessment,' argues that the weight of food-price inflation in the Consumer Price Index (CPI) inflation basket should be reduced. This adjustment aims to better reflect the financial realities of Indian households.

Although the RBI's current regime is effective, the authors suggest minor tweaks for enhancement. The regime's 4 percent target with a +/-2 percent tolerance band remains appropriate. Evidence indicates that inflation targeting has led to lower, less volatile inflation, better-anchored inflation expectations, and more effective monetary policy transmission.

(With inputs from agencies.)