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Indian industrial pricing under inflation targeting

Author

Listed:
  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

  • Vipasha Pandey

    (Indira Gandhi Institute of Development Research)

Abstract

A puzzling characteristic of post-pandemic Indian inflation is the fall, within 10 years of adopting flexible inflation targeting (IT), in core inflation to lifetime lows despite high growth and recurrent commodity price shocks. Establishing the credibility of IT is expected to take time in emerging markets (EMs) since prerequisites are thought to include independent central banks (CBs) that focus only on inflation, giving up other types of intervention. The Indian CB, however, continued foreign exchange intervention and its coordination with the government improved over the period. Even so, our evidence from multiple exercises with a disaggregated industry panel suggests firms pass-through of supply shocks reduced in the IT period. The results support the effectiveness of the communications and expectations channel in EMs compared to other channels. EM features imply prerequisites for successful IT may not be the traditional ones. Flexible inflation targeting, with procedures adapted to the context, can reduce growth sacrifice while lowering inflation.

Suggested Citation

  • Ashima Goyal & Vipasha Pandey, 2025. "Indian industrial pricing under inflation targeting," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2025-010, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2025-010
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2025-010.pdf
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    References listed on IDEAS

    as
    1. Goyal, Ashima & Parab, Prashant, 2021. "What influences aggregate inflation expectations of households in India?," Journal of Asian Economics, Elsevier, vol. 72(C).
    2. Adam Hale Shapiro, 2008. "Estimating the New Keynesian Phillips Curve: A Vertical Production Chain Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 627-666, June.
    3. Olivier Coibion & Yuriy Gorodnichenko & Michael Weber, 2022. "Monetary Policy Communications and Their Effects on Household Inflation Expectations," Journal of Political Economy, University of Chicago Press, vol. 130(6), pages 1537-1584.
    4. Goyal, Ashima & Tripathi, Shruti, 2015. "Separating shocks from cyclicality in Indian aggregate supply," Journal of Asian Economics, Elsevier, vol. 38(C), pages 93-103.
    5. Adam Hale Shapiro, 2008. "Estimating the New Keynesian Phillips Curve: A Vertical Production Chain Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 627-666, June.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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