Monetary Policy Reaction Function for India

This paper analyzes India's monetary policy reaction function in the framework of the Taylor-type rule. The analysis uses quarterly data from the period 1997 Q1 to 2020 Q2. The study indicates the highly smooth interest rate changing behavior of the RBI. The estimation of the policy reaction function using WPI and CPI found that the output gap coefficient is significant, and the inflation gap coefficient is insignificant. Additionally, the estimated results of two sub-sample periods, 1997 Q1 – 2010 Q4 and 2011 Q1 – 2020 Q2, show a significant output gap coefficient. The exchange rate coefficient is insignificant over the sample period. Another important finding is that there is higher magnitude in lagged call money rate