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Changing Dynamics of Inflation in India
Using the latest consumer price index (combined) series, it is found that the dynamics underlying India’s inflationary process have changed substantially. Significant reduction found in the inflation persistence reflects anchoring of inflationary expectations. Moreover, it is the headline inflation that reverts to the core and not vice versa, as was assumed so far. It implies the absence of any significant second-round effects. These features need to be taken into account for any policy analysis. Attempting to forecast inflation using various econometric techniques, it is found that a combination of alternative models based on mean square errors improves forecast accuracy as compared to any individual model.
The views expressed are of the authors and not of the organisations they belong to. The paper uses information and data already available in the public domain and does not use any confi dential information available to Ravindra H Dholakia as a member of the Monetary Policy Committee. The authors are grateful to the anonymous referee for useful suggestions on the initial submission.
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