Chapter 14 Imported Inflation through Exchange Rate in India

One major source of inflation in India is her import of intermediate inputs. In the modern globalized world, where India is deeply integrated with the world economy, exchange rate affects inflation through various channels. This chapter attempts to gauge the extent of exchange rate pass through to inflation. Using the co-integration framework, this chapter finds considerable evidence of imported inflation in the long run, almost 40%–74% for CPI-IW. At the same time, we also discern evidence of short-run price stickiness of CPI-IW. However, for CPI-AL, the extent of pass-through is a meager 14%. This is due to the fact that CPI-IW gives more weightage to imported components while CPI-AL gives more weight to food and clothing, which are mainly domestically produced.