Inflation Targeting as a Monetary Policy Framework: Findings from India

Author : SANDEEP AHUJA

Abstract : Inflation targeting as a framework for monetary policy was implemented in India in 2016. Prior to its adoption, apprehension was expressed by economists regarding its suitability for India. This research paper examines the change in the inter-relationship among key macroeconomic variables including inflation, repo rate, and exchange rate, post introduction of the inflation targeting regime in India. Vector Error Correction Model (VECM) is suitable for this study because it effectively captures both long-term equilibrium relationships and short-term dynamic adjustments among the macroeconomic variables. The empirical results demonstrate that adjustments in the repo rate have a more direct and timely effect on inflation compared to the impact during pre-inflation targeting. Inflation responds more consistently to changes in the repo rate, with increases in the rate effectively lowering inflationary pressures. Under inflation targeting, Reserve Bank of India places less emphasis on directly managing the exchange rate. However, currency depreciation could still influence inflation. The empirical analysis suggests that Reserve Bank of India primarily addresses these pressures through repo rate changes rather than direct interventions in the foreign exchange market.

Keywords : Exchange rate, Inflation targeting, Repo rate, VECM.

Conference Name : National Conference on Business Management and Social innovation (NCBMSI-25)

Conference Place : Patna, India

Conference Date : 8th Nov 2025