A Comparative Analysis of Monetary Policy Approaches in India: Multiple Indicator Approach v/s Inflation Targeting Strategy

Abstract

This paper studied a comparative overview of India's monetary policy, scrutinizing the Multiple-Indicator Approach era (1998-99 to 2014-15) and the subsequent adoption of Flexible Inflation Targeting (FIT) since 2016. A comparative analysis with a specific focus on inflation dynamics, output growth, and economic volatility is done using different time series data analysis techniques. It also evaluates what drives headline inflation, the official nominal anchor of the Inflation targeting framework, and how it spills over into determining household expectations on inflation and consumer confidence. This demonstrated effectiveness from 1998 to 2008, evidenced by an average real GDP growth of 7.1% and an average inflation rate of 5.5%. However, since 2008, with the outbreak of GFC, persistent challenges have emerged, including sustained high inflation and economic slowdown, prompting a global shift toward inflation targeting. The FIT era, inaugurated in 2015, marks a pivotal advancement coinciding with lower and more stable inflation.

Contrary to initial perceptions, FIT in India reveals a nuanced approach, accommodating multiple equilibria and prioritizing growth and price stability. This research provides valuable insights into the dynamic landscape of Indian monetary policy, unraveling the complexities of FIT and its implications for the nation's economic trajectory. It also deepens the understanding of India's monetary policy dynamics and contributes valuable insights into the comparative effectiveness of these two regimes.