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Monetary policy in India: The Long road to inflation targeting

Author

Listed:
  • Rajeswari Sengupta

    (Indira Gandhi Institute of Development Research
    Institute of Economic Growth)

Abstract

This paper traces the evolution of monetary policy in India and the institutional, intellectual, and macroeconomic forces that culminated in the adoption of flexible inflation targeting (FIT) in 2015. It documents the transition from a regime of fiscal dominance and quantitative controls to a market-based, interest rate-driven framework, highlighting key reforms in financial markets, liquidity management, and central bank autonomy. The paper shows how persistent inflation in the post-Global Financial Crisis period exposed the limitations of the Multiple Indicator Approach and created the conditions for a shift toward a rule-based framework with a clear nominal anchor. It also evaluates the post-FIT experience, noting improvements in inflation outcomes, expectations anchoring, and policy transparency, while emphasizing continuing constraints from fiscal dominance, and exchange rate management.

Suggested Citation

  • Rajeswari Sengupta, 2026. "Monetary policy in India: The Long road to inflation targeting," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2026-005, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2026-005
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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