Are inflation expectations anchored in India? A peek through the credibility lens

We provide a measure of the credibility of the monetary policy of India after implementation of the Flexible Inflation Targeting (FIT) framework and attempt to deduce, if inflation expectations are anchored in India. The methodology involves (a) construction of a credibility index for the period 2012 to 2022 using annual data and (b) estimation of a time-varying implicit credibility index using a time-varying regression model, for the period 2014 to 2022 using quarterly data. It is evident from both the measures that there has been a gradual rise in the credibility after implementation of the FIT framework and that credibility is sensitive to unexpected external shocks. The empirical results derived from the implicit credibility index enable us to conclude that the inflation expectations of households and professional forecasters have been anchored after implementation of FIT in India. The robustness of the empirical results is evident as similar conclusions could be drawn when ordinary least square (OLS) estimation was used instead of the time-varying regression model. Likewise, better anchoring of the short-term inflation expectations of the households and professional forecasters is evident as compared to the medium-term expectations.