Reserve Bank of India's policy dilemmas : reconciling policy goals in times of turbulence

This paper reviews some of the more critical policy dilemmas facing the Reserve Bank of India (RBI) in its pursuit of inflation stabilization and balanced growth objectives. The challenge in meeting these objectives further increased in the mid-2000s with the advent of large capital flows into the country and with RBI's role in preserving financial stability. The paper argues, drawing on several empirical results including Taylor rule estimation and nonparametric regression, that there is no simple policy solution to apply in different states of the market and reviews policy decisions undertaken by RBI against the backdrop of a disequilibrium framework where credit markets may be demand or supply constrained. Superimposing two capital flow regimes into this framework leads to identification of episodes where a hawkish (anti-inflationary) stance can give way to a dovish(pro-growth) stance.