What lowered inflation in India: Monetary policy or commodity prices?
By an amendment of the RBI Act in 2015, monetary policy in India has been recast as the pursuit of low inflation. Since then the inflation rate has mostly remained within the band specified in the agreement between the RBI and the Government of India. This has been attributed by some observers to the adoption of inflation targeting in 2016. In particular, it has been asserted that the taming of inflation reflects the anchoring of expectations of it. We evaluate these claims. Our econometric investigation indicates that there is no basis to the claim that inflation has been lowered due to the anchoring of expectations. On the other hand, we are able to fully account for the trajectory of inflation in India in terms of an explanation of inflation other than the one on which inflation targeting is premised, namely, the New Keynesian Phillips Curve.