Authors: Research Scholar Krishnapriya T S, Associate Professor Dr.P Arumugam
Abstract: Inflation is one of the most significant macroeconomic indicators influencing the stability and sustainable growth of an economy. During periods of economic uncertainty, particularly the COVID-19 pandemic, inflation exhibited substantial fluctuations characterized by extreme observations and increased volatility, indicating the presence of fat-tailed behaviour. Such characteristics often reduce the effectiveness of conventional statistical measures, making robust estimation techniques essential for reliable analysis. This study investigates the behaviour of inflation in India and examines its relationship with the Reserve Bank of India's (RBI) monetary policy, represented by the repo rate, over the period from 2014 to 2022. Monthly data obtained from the Reserve Bank of India (RBI) Database on Indian Economy (DBIE) are used for the empirical analysis. To obtain a robust measure of central tendency in the presence of extreme observations, a 25% trimmed mean is employed and compared with the conventional arithmetic mean. Furthermore, a simple linear regression model is developed to examine the relationship between inflation and the repo rate, and the model parameters are estimated using the Maximum Likelihood Estimation (MLE) method. The empirical findings indicate that inflation exhibited noticeable fat-tailed characteristics during the pandemic period, while the trimmed mean provided a more stable and representative estimate than the conventional mean. The regression analysis further demonstrates a significant association between inflation and the repo rate, highlighting the effectiveness of monetary policy interventions in maintaining price stability during periods of economic uncertainty. The study concludes that robust statistical techniques, such as trimmed mean estimation combined with maximum likelihood methods, provide valuable tools for analysing inflation dynamics and supporting evidence-based monetary policy decisions.
