A Historical Perspective on India’s Inflation Persistence: A Quantile Analysis

Abstract

This study investigates historical inflation persistence in India under three distinct regimes: monetary targeting, multiple indicators, and inflation targeting (IT). Previous studies on India often relied on mean-based techniques, which can be biased when inflation exhibits a skewed distribution. To address this, we employ a quantile-based approach to examine inflation persistence. Our findings reveal asymmetric inflation behavior, with varying persistence depending on the magnitude of the inflation-affecting shock. Inflation persistence was notably high during the multiple indicators regime but declined following the adoption of IT, especially in the pre-COVID period. While IT helped reduce persistence, it was less effective during COVID-19. Using a wavelet-based method, we also find that inflation persistence in India is closely linked to the persistence of food inflation. Given that food price shocks exhibit long-lasting effects, our findings support the case for targeting headline inflation, contributing to the policy debate in India on whether to target headline or core inflation. Overall, our results highlight the evolving nature of inflation persistence across regimes and emphasize the need for complementary supply-side measures to enhance the efficacy of monetary policy.