Inflation Expectations and Policy Relevance in India

Post adoption of the Flexible Inflation Targeting by India, the importance of anchoring inflation expectations has been taking centre stage of academic and policy research. The expectations channel is now considered as an important transmission mechanism in itself. This paper explores whether expectation formation in the Indian context can be treated as forward or backward looking with or without adaptive features, using the data from the available surveys. It is observed that the inflation expectation formation of households is predominantly naïve and repetitive and hence does not provide any additional information for policy guidance. Professional Forecasters are also unable to forecast the turning points and are overestimating inflation, thus questioning the policy relevance of such expectations. JEL classifications: E3, E5, E7