Abstract: Compared to immediately preceding years, that is, its own recent history, India’s inflation became unhinged (thereby reversing creditable performance) from as far back as 2006. The paper puts forward an empirical framework to analyse the time series and cross-sectional dynamics of inflation in India using a large panel of disaggregated sector prices for the time period 1994/95 to 2012/13. This allows us to rigorously explore issues that have been, at best, loosely posed in policy debates such as diffusion or co-movement of inflation across sectors, role of common and idiosyncratic factors in explaining variation, persistence, importance of food and energy price changes to the overall inflation process, and contrast the recent experience with the past. We find, inter alia, that the current period of high inflation is more cross-sectionally diffused, and driven by increasingly persistent common factors in non-food and non-energy sectors compared to that in the 1990s.
The paper has also introduced a novel measure of inflation, viz., Pure Inflation Gauges (PIGs) in the Indian context by decomposing price movements into those on account of: (i) aggregate shocks that have equiproportional effects on all sector prices; (ii) aggregated relative-price effects; and (iii) sectorspecific and idiosyncratic shocks. If PIGs, in conjunction with our other findings, for example, on persistence had been used as a measure of underlying (pure) inflationary pressures, the monetary authorities may not have been sanguine regarding the timeliness of initiating anti-inflationary policies.
Dr. Gangadhar Darbha has more than 15 years of research and investment banking experience. His areas of professional expertise include fixed income analytics, algorithmic trading and high-frequency quantitative trading strategies, quantitative Risk capital allocation strategies, and macro-economic modeling. Gangadhar Darbha is currently employed with Nomura securities as Head of Algorithmic Trading Strategies and Execution Services. Previously he was employed in Royal Bank of Scotland, Morgan Stanley in London; Indian School of Business, Hyderabad; National Stock Exchange of India Ltd, Mumbai; National Institute of Public Finance and Policy, New Delhi; University of Pretoria, South Africa; and Free University, Amsterdam. He was a member of Committee on Financial Benchmarks and Urjit Patel committee on Monetary Policy framework set up by the Reserve Bank of India. He is also a Director on the Board of Nomura Structured Finance Limited, and a member of the academic council of BSE Institute Limited. He is a regular columnist in Mint/Walstreet, Financial Express and Economic Times. Gangadhar Darbha holds Post-doc in Finance from The Wharton School, University of Pennsylvania and PhD in Economics from IGIDR, Mumbai.
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