What is Responsible for India’s Sharp Disinflation?

Author/Editor:

Sajjid Chinoy ; Pankaj Kumar ; Prachi Mishra

Publication Date:

August 8, 2016

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We analyze the dramatic decline in India’s inflation over the last two years using an augmented Phillips Curve approach and quantify the role of different factors. Our results suggest that, contrary to popular perception, the direct role of lower oil prices in India’s disinflation was relatively modest given the limited pass-through into domestic prices. Instead, we find that inflation is a highly persistent process in India, reflecting very adaptive expectations and the backward looking nature of wage and support price-setting. As a consequence, we find that 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.

Series:

Working Paper No. 2016/166

Subject:

Disinflation Food prices Inflation Labor Price indexes Prices Wages

English

Publication Date:

August 8, 2016

ISBN/ISSN:

9781475523935/1018-5941

Stock No:

WPIEA2016166

Pages:

37

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