Inflation-Growth Relationship: New Evidence for India

This paper revisits the threshold level of inflation for India. The empirical analysis follows spline regression for the period 1996–97Q1 to 2019–20Q4. The results suggest the existence of a statistically significant threshold level of inflation at 5 to 5.5% in terms of both CPI and WPI. Below this level, the impact of inflation on growth is generally positive whereas it is negative above this level, and therefore injurious to growth. Hence, policymakers in India may consider reducing the tolerable band from 4 ± 2% to 4 ± 1.5% under the flexible inflation targeting regime with a vision to further compress it to 4 ± 1% in due course.