What is Responsible for India's Sharp Disinflation?

38 Pages Posted: 9 Dec 2016

See all articles by Sajjid Chinoy

Sajjid Chinoy

JP Morgan

Pankaj Kumar

Government of India - Reserve Bank of India

Prachi Mishra

International Monetary Fund (IMF) - Research Department

Date Written: August 2016

Abstract

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.

Keywords: Disinflation, India, Inflation, Wages, Econometric models, inflation, India

JEL Classification: E31, E37, E52

Suggested Citation

Chinoy, Sajjid and Kumar, Pankaj and Mishra, Prachi, What is Responsible for India's Sharp Disinflation? (August 2016). IMF Working Paper No. 16/166. Available at SSRN: https://ssrn.com/abstract=2882603

Sajjid Chinoy (Contact Author)

JP Morgan ( email )

London
United Kingdom

Pankaj Kumar

Government of India - Reserve Bank of India ( email )

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

Prachi Mishra

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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