Is Monetary Policy Maintaining Price Stability in India? An Empirical Investigation

Abstract

The purpose of this study is to empirically investigate whether monetary policy maintains price stability over the long-run and short-run in India. The study uses annual time series data for the period 2001–2022 and applies the autoregressive distributed lag model (ARDL). In the study, the consumer price index is a dependent variable and is used as a proxy measure of price stability, while the cash reserve ratio, statutory liquidity ratio, bank rate, reverse repo rate and repo rate are independent variables. Moreover, the Chow test is employed to detect structural breaks. The results show no structural change attributable to the financial crisis in 2008 and the COVID-19 epidemic in 2020. The results of the bounds test reveal that selected variables have long-run relationships. The empirical findings of the study show that monetary policy maintains price stability in India in both the long-run and short-run. The study recommends the Reserve Bank of India employ a non-accommodative monetary policy to maintain price stability and focus on the repo rate as it has a robust and long-run impact on inflation in India.