Inflation control: India doing better than advanced economies like US and Germany, says SBI report

India has shown a largely successful inflation-targeting regime compared to advanced economies like the United States and Germany, reported ANI, quoting a State Bank of India (SBI) research report.

“India had a largely successful inflation targeting regime, compared to advanced economies like the USA and Germany,” as per the report.

The SBI report cited government initiatives, Reserve Bank of India (RBI) measures, and the banks as the reasons for allowing better policy transmission and improving inflation management.

“The success of inflation targeting in India is largely a byproduct of a vibrant financial ecosystem where the RBI, government and the banks are working closely in unison in ushering in market reforms,” according to the agency report.

The SBI report also highlighted that India saw minimal deviations from its inflation targets between 2021 and 2024, setting it apart from the other global economies that faced greater inflation challenges.

From 2021 to 2024, India recorded one of the lowest deviations from its inflation targets, demonstrating the effectiveness of the country's inflation control measures. This is a result of coordinated efforts between the RBI and the central government, ANI quoted the SBI report as saying.

The synchronisation of monetary and fiscal policy during the pandemic played a key role in maintaining price stability, as per the report. The report also highlighted the country's pre-inflation targeting regime and how it faced challenges like fiscal dominance, the presence of a large informal sector, significant informal financing, and inefficiencies in how banks priced their loan products.

“Effectiveness of monetary policy in India's pre-inflation targeting regime was constrained by several India-specific factors that affected transmission of the policy impulses through the interest rate channel,” as per the report.

SBI on RBI's inflation targeting system:

The RBI's inflation targeting system has anchored inflationary expectations, even as food inflation remains high. The notion that headline inflation should exclude food prices was dismissed as counterfactual. The system has prevented a spillover from food inflation to core inflation.

The central bank's inflation target of 4 per cent has been important in successfully anchoring inflation expectations. By reinforcing the target commitment, the RBI has helped stabilise inflationary trends across the economy, according to the report.

The SBI report backed up India's monetary policy framework at a time when global economies like the US and Germany face inflationary pressures, according to the agency report.