Inflation Expectations of Households and Portfolio Rebalancing: Evidence from Inflation Targeting in India

42 Pages Posted: 9 Apr 2022 Last revised: 27 Sep 2023

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Yeow Hwee Chua

Nanyang Technological University (NTU)

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Changcheng Song

Singapore Management University

Date Written: January 10, 2022

Abstract

This paper exploits a natural experiment in India – Inflation Targeting to study how changes in inflation expectations influence households’ consumption and portfolio choices. Using regional heterogeneity in inflation expectations due to the Inflation Targeting policy, we find that households with high liquid wealth decreased consumption and increased savings when faced with a fall in inflation expectations. Moreover, they rebalanced their portfolio from risky investments towards bank deposits. This is attributed to the nominal rigidity of savings deposit rate. In comparison, households with low liquid wealth consume more and save less as inflation expectations fell. Our findings provide direct evidence on how the transmission of inflation expectations through different economic channels is influenced by the household balance sheet.

Keywords: Inflation Expectations, Inflation Targeting, Household Finance, Household Balance Sheet, Consumption, Savings, Reach for Yield

JEL Classification: D12, D84, D91, E21, E31, E52

Suggested Citation

Agarwal, Sumit and Chua, Yeow Hwee and Ghosh, Pulak and Song, Changcheng, Inflation Expectations of Households and Portfolio Rebalancing: Evidence from Inflation Targeting in India (January 10, 2022). Available at SSRN: https://ssrn.com/abstract=4069564 or http://dx.doi.org/10.2139/ssrn.4069564

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Yeow Hwee Chua (Contact Author)

Nanyang Technological University (NTU) ( email )

Singapore
Singapore

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Changcheng Song

Singapore Management University ( email )

50 Stamford Road
Singapore
Singapore
+6568289610 (Phone)

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