Monetary Policy and Inflation Targeting in India

In May 2022, India’s retail inflation rate rose above the upper limit of the target range set by the Reserve Bank of India in 2015, to reach 7.79 per cent. In recent years, India’s retail inflation rate had been successfully kept within the target range of 2–6 per cent as the economy grew steadily. Everything changed in March 2020, however, when the outbreak of the COVID-19 pandemic disrupted the economy of all countries around the world. In February 2022, two years after the outbreak of the pandemic, Russia invaded Ukraine, which further disrupted the global supply chains. As a result, all major economies had to closely manage their monetary policies with contractionary measures and use policy rates to contain inflation. Eventually, by March 2023, the inflation rate in India dropped to 5.66 per cent, within the target range. The Reserve Bank of India’s governor had paused the rate hike in April after noticing that high interest rates were adversely affecting investments and growth prospects in the Indian economy. He knew that he had to continue using contractionary monetary policies but could not lower the policy repo rate, when inflation across major economies such as the United States and the United Kingdom were showing no signs of calming. He could choose to increase or keep the repo rate unchanged. Alternatively, he could choose a contractionary measure such as quantitative tightening.

This case is suitable for modules on monetary policy in a macroeconomics course at the postgraduate or MBA level. It can also be used in undergraduate economics courses to explain the role of monetary policy in macroeconomic equilibrium. In addition, this case can be used in any course on public policy, to illustrate the dilemma that policymakers face in challenging situations that are influenced by an external economic environment. Finally, the case can be used in business strategy courses to explain alternative strategic decisions available to decision-makers during challenging times. After working through the case and assignment questions, students will be able to<ul><li>understand the impact of monetary policy on economic performance for a country;</li><li>understand the difficulties of implementing a contractionary (or expansionary) monetary policy in an inflationary (or deflationary) environment;</li><li>understand the interaction of monetary policy with fiscal policy and the financial markets of an economy;</li><li>understand the interrelationship between an economy’s money supply, unemployment, and gross domestic product growth in an aggregate demand/aggregate supply framework; and</li><li>understand challenges of inflation targeting in an emerging economy and how it can conflict with other macroeconomic measures.</li></ul>

• inflation targeting
• monetary policy