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Does Monetary Policy in India Anchor Inflation Expectation?

Publication date

Apr, 2023

Details

NIPFP Working Paper No. 395

Authors

Rudrani Bhattacharya

Abstract

Abstract

India has entered into the Inflation Targeting (IT) monetary policy regime in 2015. Under this rule-based monetary policy regime, changes in the policy rate transmits to the economic activities and current inflation rate by altering the inflation expectation of the rational economic agents. This study empirically investigates whether monetary policy can anchor inflation expectation of economic agents in India. In our analysis, the survey based measure of households’ inflation expectation published by the Reserve Bank of India (RBI) captures inflation expectation of private agents. Using a co-integrated Vector Auto Regression (VAR) model, we find moderate but significant monetary policy transmission in India via interest rate channel. However, inflation expectation seems to be unanchored by monetary policy conduct in the country. Our finding is found to be robust under alternative modeling frameworks.

JEL Clasification: C32, C5, E31, E52, E58.

Keywords: Inflation expectation, Monetary policy, Co-integrated VAR, India.

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