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Impact of Exchange Rate Pass-Through on Inflation in India

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Managing the Macroeconomy

Abstract

The exchange rate channel of monetary policy is important for many developing countries. When a central bank lowers the policy rates, this action often results in a depreciation of that country’s currency which in turn makes imports more expensive while enhancing the price competitiveness of that country’s exports. However, for the exchange rate channel to operate effectively, the implicit assumption is that exporters will adjust the home price of their goods or services in such a way as to keep the price in the importing country more or less unchanged (by either adjusting costs or mark-ups or some combination of the two). More generally, it is possible that exporters may not fully pass-through exchange rate movements to prices in importing countries by adjusting their domestic country prices.

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Author information

Authors and Affiliations

  1. George Mason University, USA

    Ramkishen S. Rajan (Professor, Visiting Professor)

  2. National University of Singapore, Singapore

    Ramkishen S. Rajan (Professor, Visiting Professor)

  3. The World Bank Group, USA

    Venkataramana Yanamandra (Consultant)

Authors
  1. Ramkishen S. Rajan
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  2. Venkataramana Yanamandra
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© 2015 Ramkishen S. Rajan and Venkataramana Yanamandra

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Rajan, R.S., Yanamandra, V. (2015). Impact of Exchange Rate Pass-Through on Inflation in India. In: Managing the Macroeconomy. Palgrave Macmillan, London. https://doi.org/10.1057/9781137534149_4

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