How high is exchange rate pass-through in India? Has it changed over time?

Abstract

Concerns about relatively high degrees of exchange rate pass-through in a number of emerging economies have contributed to a fear of floating. Despite the obvious policy relevance of this issue there is hardly any existing literature that has examined aggregate CPI pass-through for India, which has been liberalizing its economy since 1991. This paper estimates exchange rate pass-through (ERPT) at the aggregate level into India's CPI for the period 1980Q1 – 2005Q3. We also analyze whether exchange rate pass-through in India has changed over time, particular since 1991, which was the beginning of the country's economic liberalization program.

Key words:

• Exchange rate pass-though
• fear of floating
• India
• inflation
• NEER

Notes

¹ Given the data is of quarterly frequency, for purposes of sensitivity analysis we also tested for unit roots at seasonal frequencies – lag lengths of 4 and 8. The results were largely unaffected.

² We excluded 1991 as this was the crisis period (India suffering a balance of payment crisis in June 1991). However, we tried various cut-off dates but the results were largely unchanged.

³ Recent literature on pass-through has focused on declining pass-through across the world. For details see (Campa & Goldberg, 2005; Frankel et al., 2005; Taylor, 2000 and the review by Ghosh & Rajan, 2007).