Indian industrial pricing under inflation targeting

Ashima Goyal () and Vipasha Pandey ()
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Ashima Goyal: Indira Gandhi Institute of Development Research
Vipasha Pandey: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

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.

Keywords: Inflation targeting; firms' price-setting; supply shocks; expectations channel (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2025-04
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