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PDF document (104 kb)
Date : Feb 26, 2021
Contents
Chapter I: Flexible Inflation Targeting (FIT) in India
1 Introduction
2 Initial Conditions
3 Preconditions
4 Experience with FIT
5 Conclusion
Chapter II: The Goals of Monetary Policy
1 Introduction
2 Country Experience
3 The Inflation Target
4 The Tolerance Band
5 Other Features of India’s Inflation Process
6 The Objective of Growth
7 Conclusion
Chapter III: Monetary Policy Decision Making Process
1 Introduction
2 Experience with the MPC: Voting Patterns (2016-2020)
3 Evaluation of the Projection Performance, Communication and Transparency
4 What Works for India’s MPC
5 What Needs to Change
6 Conclusion
Chapter IV: Operating Procedure of Monetary Policy
1 Introduction
2 Some Stylised Facts
3 Fine-tuning the Operating Procedure and Transmission Channels
4 Conclusion
Chapter V: Open Economy Flexible Inflation Targeting
1 Introduction
2 Openness: Some Stylised Facts
3 Exchange Rate Dynamics and FIT
4 Open Economy Taylor Rule
5 Conclusion

LIST OF BOXES
Sr. No. Particulars
I.1 Insights from Country Framework Reviews
I.2 Evolution of Ideas on Inflation Targeting in India
II.1 Trend Inflation in India
II.2 Estimates of Threshold Inflation for India
II.3 Stabilisation of Inflation Expectations during FIT in India
III.1 Monetary Policy Process of the Monetary Policy Committee
III.2 Inflation and Growth Projection Process
III.3 Transmission of Food and Fuel Shocks to Core Inflation
IV.1 Liquidity Management Framework
IV.2 Volatility of WACR – Key Determinants
IV.3 Policy Transmission to the Operating Target
IV.4 Transmission to other Markets
IV.5 Impediments to Monetary Policy Transmission during FIT
V.1 Drivers of INR Volatility
V.2 Sensitivity of INR to Risk Premia
V.3 Sterilisation Effectiveness during FIT
V.4 Exchange Rate Pass-Through during FIT
V.5 Open Economy Taylor Rule Estimates for India

LIST OF TABLES
Sr. No. Particulars
I.1 Monetary Policy Reaction Function (2000-01 to 2010-11)
I.2 Transition to FIT in India
I.3 Headline Inflation – Key Summary Statistics
I.4 CPI-C Inflation Components, Agricultural Growth and International Crude Oil Prices – Level and Volatility
I.5 Core and Non-Core Inflation Dynamics
I.6 Key Macroeconomic Indicators under FIT – Level and Volatility
I.7 Monetary Policy Reaction Function (First MPC’s Tenure)
II.1 Inflation Target and Tolerance Band for EMEs
II.2 Trend Inflation Estimates of India
II.3 Threshold Inflation Estimates of India
II.4 Performance of Different Food Sub-Groups during Pre and Post - FIT
II.5 Accuracy, Unbiasedness, Efficiency and Autocorrelation of Inflation Forecasts over Forecast Horizons
II.6 Estimates of Inflation Persistence
II.7 Correlation between Inflation Expectations (IE) and Actual Inflation
II.8 Average GDP Growth and Related Indicators
III.1 Voting Records of the MPC Members on the Policy Rate
III.2 Voting Records of the MPC members on Monetary Policy Stance
III.3 The MPC Voting Summary (October 2016-March 2020)
III.4 EG index for RBI Pre-FIT and FIT
III.5 Structure of Monetary Policy Decision Making Committees
III.6 MPC Decision Making Process
III.7 Monetary Policy Transparency and Communication across Central Banks
III.8 Accountability Mechanism
III.9 Shut Period Practices: Major Central Banks
III.10 Tenure of Committees for Monetary Policy Decision Making
III.11 Contents of the Communication Policy Document
III.12 Timing of Policy Announcement
III.13 Central Banks Providing Guidance on Policy Rate Path
III.14 Definition of Failure
III.15 Episodes of High Food Price Inflation
III.16 Episodes of Low Food Price Inflation
IV.1 Reforms in the Operating Framework
IV.2 Share in Overnight Money Market Volume
IV.3 Operating Target and Monetary Marksmanship
IV.4 Liquidity Management Instruments
IV.5 Fine-Tuning Operations
IV.6 Key Liquidity Indicators (period averages)
IV.7 Policy Rate Changes
IV.8 Policy Transmission to Financial Market Segments
IV.9 Transmission from Repo Rate to Banks' Deposit and Lending Interest Rates
IV.10 Transmission across Bank Groups -Tightening and Easing Policy Cycles
IV.11 Market Timings
IV.12 Proportion of Loans linked to Internal and External Benchmarks
V.1 India's External Vulnerability Indicators
V.2 Episodes of Excess Capital Inflows
V.3 Reserve Money and Drivers of Durable Liquidity
V.4 ERPT Estimates from Select Studies in the Indian Context

LIST OF CHARTS
Sr. No. Particulars
I.1 Key Policy Rates in Select Economies
I.2 Global Commodity Prices, Domestic Inflation and GDP Growth
I.3 Inflation and Growth – India vs. Global
I.4 Liquidity, Asset Prices and Inflation
I.5 Growth in IIP: Old and Revised Series
I.6 WPI Inflation, CPI Inflation and Inflation Expectations
I.7 Historical Decomposition of WPI Non-food Non-fuel Inflation
I.8 Policy Rate, CRR and SLR
I.9 Estimated Policy Rates (with WPI and CPI)
I.10 Implications of Delayed Policy Response (Difference between response with delay and without delay)
I.11 WPI and GDP Deflator
I.12 Return on Assets and Household Savings
I.13 GFD, Public Investment, CAD and Gold Import
I.14 Movement in Exchange Rate and Forex Reserves
I.15 Repo Rate, MSF Rate and WACR
I.16 Scenarios – Transitory and Persistent Food Price Shocks
I.17 Headline Inflation vis-à-vis Glide Path/Inflation Target
I.18 Central Government Gross Fiscal Deficit
I.19 QPM – Feedback Mechanism and Transmission
I.20 Kernel Density of CPI Headline and Sub-groups Inflation
I.21 Domestic CPI and Global Commodity Price Inflation
I.22 Domestic CPI Core and Global Non-food Commodity Price Inflation
I.23 Relative Food Prices
I.24 State-wise Inflation Differential and its Kernel Density Function
I.25 CPI Inflation: Rural vs. Urban
I.26 Trend GDP Growth and Saving-Investment Rates
I.27 Growth in Bank Deposit, Money and Credit
I.28 Employment and Capital Stock and their Contributions to GVA
I.29 Labour Force Participation and Labour Productivity in India
I.30 Incremental Capital Output Ratio (ICOR)
I.31 Demographic Developments
I.32 External Drag on Growth
I.33 Movement in Headline Inflation
I.34 Degree of Disagreement in MPC Voting Pattern
I.35 Contribution of Inflation Gap and Output Gap to Policy Rate Deviations
II.1 Inflation Targets in IT countries
II.2 Evolution of Inflation Targets
II.3 Changes in Inflation Target and Tolerance Band
II.4 Reformulation of Inflation Target
II.5 Estimates of Trend Inflation
II.6 Structural Breaks in CPI Inflation
II.7 Distribution of Major Components of CPI Inflation in India
II.8 Contribution to Headline Inflation
II.9 Contribution to Volatility in Headline Inflation
II.10 High Volatility and Asymmetric Pass-through of Fuel Prices
II.11 Supply Shocks and their Impact on Inflation
II.12 Distribution of Cyclical Component of Inflation
II.13 Inflation Trend, Persistence and Volatility
II.14 Inflation Expectations in select EMEs
II.15 Inflation Expectations in select Advanced Economies (AEs)
II.16 Inflation Perception of Households Vs. Actual Inflation
II.17 Inflation Expectations: Households vis-à-vis Other Agents
II.18 CPI Inflation and Inflation Expectations during pre- and post-FIT Period
II.19 Output-gap and Real Policy Rate
II.20 Passive Tolerance of Inflation (Shock: One Percentage points)
III.1 Share of Inflation and Growth Discussions in the MPC Members' Statements
III.2 Word Clouds across Monetary Policy Stances, October 2016 - March 2020
III.3 Distribution of Inflation and Growth Word Count across the MPC Policy Stances
III.4 Policy Meetings and the MPC Dissent Votes
III.5 Actual versus Projected Inflation during FIT
III.6 Inflation Projection Errors during FIT across Projection Horizons
III.7 Revision in GDP Growth
III.8 Actual versus Projected GDP Growth during FIT
III.9 GDP Growth Projection Errors across Projection Horizons
III.10 EG Transparency Index of Central Banks
III.11 1-Month and 3-Month OIS Rate: Pre-FIT and FIT
III.12 Repo Rate: SPF Projections versus Actuals
III.13 Media Sentiment One Day Prior to Policy Day
IV.1 Corridor Marksmanship
IV.2 Corridor Width and WACR Volatility
IV.3 Evolution of Corridor Width
IV.4 Reserve Maintenance
IV.5 Estimated Volatility (IGARCH) of WACR
IV.6 WACR vis-a-vis the Policy Corridor
IV.7 Cost of Deposit/Funds and Policy Repo Rate
V.1 India's Openness Indicators
V.2 Net Capital Flows to EMEs
V.3 India's Foregn Trade during FIT
V.4 Volatility in Capital Flows in India
V.5 Exchange Rate Volatility
V.6 Differential in Short-term Interest Rates (India-US) and INR Exchange Rate
V.7 Interest Rate Differentials and Forward Premia on USD/INR
V.8 Share of Foreign Currency Assets in Total Assets
V.9 Movement in MCI

Annex
Sr. No. Particulars
II.1 Threshold Inflation Estimates for India in Empirical Literature
II.2 Optimal Inflation in a Macroeconomic Framework
II.3 Supply Shocks and the Lower Tolerance Band
II.4 Objectives of Monetary Policy for the Inflation Targeting Countries
II.5 Structural Reforms during Inflation Targeting Regime
III.1 Monetary Policy Committee - Statutory Provisions on Processes
III.2 The MPC Voting Patterns (October 2016-March 2020)
III.3 Central Bank Transparency Index
III.4 Model MPC Communication Document
IV.1 Monetary Policy Operating Frameworks - Key Features
IV.2 Lags in Transmission to Output and Prices: A Cross-country Evidence
IV.3 Benchmark for Interest Rates on Loans

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