Since the start of the 21st century, inflation in India has mirrored its relative macroeconomic stability. For instance, between 2000 and 2006, the CPI averaged just 4 per cent during a period where growth and investment began a secular acceleration and external imbalances narrowed rapidly. However, that relative stability in the CPI began to change in 2006, when it rose dramatically by an average of more than 9 per cent between 2006 and 2013.
The stickiness of inflation coincided with greater global economic pessimism: the post-Lehman growth rebound was temporary, external imbalances began to widen as households flocked to physical assets and gold, and the Indian rupiah came under sustained depreciation pressures, with things coming to a head when the Federal Reserve tapered one of its Quantitative Easing programs in 2013.
However, as rigid as the CPI was between 2006 and 2013, its fall has been just as dramatic. After peaking at 12.1 per cent in November of 2013, the CPI collapsed to 4.3 per cent in December 2014, a fall of almost 8 per cent in only 13 months, before increasing to 5 per cent in October, 2015. This dramatic decline in the CPI has led to two important and related questions. First, what was responsible for the sharp decline over the last two years? And second is this decline in the CPI sustainable, or is it transitory?
Answers to these questions are not trivial, given the global and domestic events during this period. The disinflation over the last two years has occurred when global oil and commodity prices have collapsed, food prices have fallen sharply, the implementation of a new monetary policy regime by the Reserve Bank of India to anchor inflation expectations, a new Government working on alleviating food supply bottlenecks, and the continued restraint on agricultural support prices. So how does one ascertain the extent to which different factors contributed to this disinflation?
The purpose of this study will be to analyse this dramatic decline in inflation, and quantify the contribution of the different factors in explaining the recent reduction in inflation that has occurred in India, using an augmented Phillips curve. The CPI (and inflation) will also be disaggregated by State and rural/urban location to examine the importance of inflation to those living in poverty and potential impacts that changes in inflation can have on their lives.
This project is led by George Tawadros. Other investigators include Ankita Mishra and Imad Moosa from the Research Group and Prof Jay Misra and Dr Peter Holzschuh from Amrita University, India.