Inflation, Inflation Uncertainty and Economic Growth in India: A Pre- and Post-Inflation Targeting Analysis
Authors
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Shine Shaji
Research Scholar (Corresponding Author), Department of Econometrics, University of Madras, Chepauk Campus, Chennai - 600 005, Tamil Nadu
https://orcid.org/0009-0007-8369-1562
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P. Mahendra Varman
Associate Professor, Department of Econometrics, University of Madras, Chepauk Campus, Chennai - 600 005, Tamil Nadu
https://orcid.org/0000-0002-8931-7404
DOI:
https://doi.org/10.17010/aijer/2026/v15i2/174540Keywords:
inflation targeting, inflation volatility, economic growth, GARCH models, macroeconomic policy.JEL Classification Codes :C22, E31, E52, E60, O40
Publishing Chronology: Paper Submission Date : January 5, 2026 ; Paper sent back for Revision : January 22, 2026 ; Paper Acceptance Date : March 10, 2026.
Abstract
Purpose : The paper examined whether the adoption of a flexible inflation-targeting (FIT) framework in India has altered the relationship between inflation volatility and economic growth. Also, it sought to highlight the asymmetric nature of inflation volatility in India.
Methodology : Inflation volatility is modelled using Conditional heteroscedasticity models, such as Generalised Autoregressive Conditional Heteroscedasticity (GARCH (1, 1)) and Exponential Generalised Autoregressive Conditional Heteroscedasticity (EGARCH (1, 1)). It further compared these models to identify which one better captured persistence and asymmetric responses to inflationary shocks. Once the optimal model was chosen, the resultant conditional volatility was incorporated into growth regressions estimated using ordinary least squares (OLS). The analysis compared the periods before and after the adoption of inflation targeting (IT) as well as the combined sample.
Findings : The introduction of the FIT framework resulted in a significant reduction in both average inflation and inflation volatility. The pre-inflation-targeting period witnessed a significant negative impact of inflation volatility on economic growth, whereas this adverse effect became insignificant during the inflation targeting period, indicating a weakening of the volatility–growth nexus. The combined analysis provided the evidence of a positive structural shift in growth, though renewed volatility shocks can still pose risks to economic growth with inflation targeting framework. Together with this, the conventional factors such as real investment and fiscal expansion continued to be supporting economic growth, while fluctuations in global crude oil prices exerted a constraining influence.
Practical Implications : The findings underscore the role of IT in strengthening macroeconomic stability and improving growth predictability, offering relevant insights for monetary policy formulation in emerging economies.
Originality : The study provided statistical evidence on the moderation of the inflation uncertainty-growth relationship under an inflation-targeting framework by integrating asymmetric volatility modelling with growth analysis in the Indian context.
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