What is Responsible for India’s Sharp Disinflation?

IMF Working Papers, August 8, 2016

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What is Responsible for India’s Sharp Disinflation?

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Bibliographic details

• Authors: Sajjid Chinoy, Pankaj Kumar, Prachi Mishra
• Published: August 8, 2016
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475523935.001

Methodology

• Analysis using an augmented Phillips Curve approach.

Key findings

• The dramatic decline in India’s inflation over the last two years is analyzed and decomposed.
• The direct role of lower oil prices in India’s disinflation was relatively modest given the limited pass-through into domestic prices.
• Inflation in India is a highly persistent process, reflecting:
  • very adaptive expectations, and
  • the backward looking nature of wage and support price-setting.
• A moderation of expectations, both backward and forward, and a rationalization of Minimum Support Prices (MSPs) explain the bulk of the disinflation over the last two years.

Policy implications / recommendations (as implied by findings)

• Addressing adaptive expectations could be central to sustaining lower inflation.
• Rationalization of Minimum Support Prices (MSPs) is an important factor in managing inflation dynamics.

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