A recent research report by the State Bank of India (SBI) shows that India has done a relatively good job of managing inflation compared to advanced economies like the USA, Germany, and France. The report points out that India’s inflation-targeting regime has been successful, which is also a coordinated action between the government, the Reserve Bank of India (RBI), and banks.
The SBI report elaborates on the reasons for the relative success of inflation management in India during the last decade, highlighting various factors: Government initiatives, proactive roles of the RBI, and banks collectively helped in this regard; thus, India has achieved better policy transmission and effective control of inflation.
The report points out that deviations of India from its inflation targets remained relatively minimal between 2021 and 2024. When most of the other global economies went through higher inflationary pressures. In the period under reference, India recorded one of the lowest deviations from its inflation targets. Indicating how good its inflation control policies had been. This is attributed majorly to the coordination between the RBI and the central government.
The report highlights that India’s inflation targeting regime operates more effectively than those of advanced economies like the USA and Germany. This effectiveness stems from the coordination of monetary and fiscal policies. Especially during the pandemic, which significantly contributed to price stability. This synchronization allowed India to manage inflationary pressures effectively, unlike many other economies.
The report also addresses issues with India’s pre-inflation targeting regime. Before adopting inflation targeting, India faced several challenges in monetary policy transmission. These included long-standing fiscal dominance, a large informal sector, substantial informal financing, and inefficiencies in how banks priced their loan products.
Nevertheless, the report asserts that the RBI’s inflation targeting has successfully anchored inflation expectations, despite high food inflation. It rejects the notion that headline inflation should exclude food prices, considering this view as counterfactual. Instead, the success of the RBI in reining in inflation, despite the volatility in food prices, has arrested the spillover of food inflation to core inflation.
The report also puts in limelight the importance of unequivocal, swift communication by the RBI on its inflation target at 4%. This unequivocal commitment has been key in anchoring inflation expectations and stabilizing the inflationary trends in the broader economy. This reinforcement supports the anchoring of the above target and allows conducting monetary policy. Both in averting inflationary pressures and in sustaining overall economic stability.
In essence, the SBI report reinforces the effectiveness of India’s monetary policy framework. The report zeroes in on India’s successful inflation management in the context of the global inflationary pressures. Faced by advanced economies such as the US and Germany. A combination of effective inflation targeting and the synchronization of policy has placed India in a strong position. Vis-à-vis managing inflation in difficult economic circumstances.
ANI
