Understanding the relationship between the grain size and mechanical properties of nanocrystalline magnesium aluminate (MgAl₂O₄) spinels is important due to their strong potential for transparent structural applications. In this study, nanocrystalline MgAl₂O₄ with grain sizes ranging from 3.7 to 80 nm have been synthesized by environmentally-controlled pressure assisted sintering, and the effect of grain size on plasticity mechanisms under nanoindentation was investigated for grains sizes within the Hall-Petch regime (80 nm), the inverse Hall-Petch regime (3.7 nm), and near the transition grain size (10.5 nm). Transmission electron microscopy (TEM) and electron diffraction of a sample with an 80 nm grain size revealed significant residual lattice distortion and grain boundary decohesion induced by dislocation plasticity. In contrast, a sample with a 3.7 nm grain size did not show any dislocations or residual lattice distortion even within the severely deformed region right below the indent. Instead, shear bands formed, and atomic scale grain boundary decohesion was observed only within shear bands. Large-scale atomistic simulations of MgAl₂O₄ with a 3.7 nm grain size show that plastic strain is developed mostly at grain boundaries without dislocation nucleation or grain growth, suggesting that grain boundary sliding is the dominant mechanism by which shear bands develop for the inverse Hall-Petch regime. Our results provide an important insight into the plasticity mechanisms for nanocrystalline ceramics with different grain sizes.