NO : WP-2022-012
AUTHOR : Prashant Parab
TITLE : Exchange Rate Pass-through in India
ABSTRACT :
Investigating exchange rate fluctuations is important to understand their influence on domestic inflation dynamics of the country as well as to study the stabilisation role played by the monetary policy. Understanding exchange rate pass-through (ERPT) is important especially from emerging markets’ perspective since they tend to be net importers. This study examines ERPT for India from 2005Q2 to 2021Q2, i.e., the effects of the nominal effective exchange rate (NEER) on the domestic inflation captured using CPI and WPI. Using linear and non-linear ARDL models, we discover less than perfect exchange rate pass-through for India. The influence is higher for WPI than CPI on account of inelastic crude oil imports. This study also finds a higher influence of exchange rate appreciation than that of depreciation due to the policy measures to limit the pass-through effect of exchange rate depreciation but allowing appreciation to have a complete pass-through.
Keywords: Exchange rate pass-through; ARDL; NARDL; Nominal effective exchange rate; Inflation dynamics.
JEL Code: C32, E31, E32, F31
Weblink: http://www.igidr.ac.in/pdf/publication/WP-2022-012.pdf
