An analysis of Indias monetary policy frameworks from monetary targeting to inflation targeting

Abstract

The present study attempted a country specific exercise to analyze the Monetary Policy Frameworks of India from the perspective of Modern Monetary Policy Rules: Taylor Rules and McCallum Rules. The study sought to examine the conduct of RBI for its interest rate setting behaviour over the three monetary policy frameworks with respect to various macroeconomic variables like inflation rate, output gap and exchange rate and analyze whether RBI formulates rule based policy or employs full discretion. The study highlights that the monetary management in India has become more complex given the challenges emanating from various financial economic factors. The policy stance tends to be dovish with greater focus on output gap. However, there has been a breakdown of rules in periods of crises with has led to higher inflationary expectations and hence higher actual inflation. newline