Exchange rate (USD/INR) pass‐through and wholesale price index: A flexible least square approach

• Author: Sivalingam Veeramani,Arjunan Vadivel,Chandrashekar Raghutla
• Published date: 01 August 2020
• Date: 01 August 2020
• DOI: http://doi.org/10.1002/pa.2087

ACADEMIC PAPER

Exchange rate (USD/INR) pass-through and wholesale price

index: A flexible least square approach

Arjunan Vadivel

1

| Sivalingam Veeramani

2

| Chandrashekar Raghutla

3

1

Department of Economics, Arignar Anna

Government Arts and Science College,

Karaikal, Pondicherry, India

2

Centre for Management Studies, Jamia Millia

Islamia University, New Delhi, India

3

Department of Economics, School of

Humanities and Social Sciences, GITAM

University, Hyderabad, Telangana, India

Correspondence

Chandrashekar Raghutla, Department of

Economics, School of Humanities and Social

Sciences, GITAM University, Hyderabad,

Telangana, India.

Email: chandrashekareco@gmail.com

Abstract

The paper explores the exchange rate (USD/INR) pass-through and the wholesale

price index in India. Exchange rate pass-through (ERPT) has a stimulated effect on

the wholesale prices over the period of time. We use flexible least square approach

to estimate time varying approach of ERPT and wholesale price, monthly data for the

period from April 1994 to May 2019, find exchange rate over the period of time as

well as change the wholesale price. It implies that the ERPT provides heterogeneity

information that change the whole price index, even both export/import goods and

services play a vital role in fluctuating on exchange rate and also change whole price

in the domestic market.

1|INTRODUCTION

The interesting issues in international finance particularly an exchange

rate movement are a pass-through to domestic prices much-debated

issues for policy makers and academicians. There is large degree of

variations in exchange rate pass-through in domestic economy. The

central bank has uses in conducting monetary policy tightening/

expansion, which attempted to measure exchange variation and whole

price index. The nominal exchange rate change to domestic economy

will lead/reverse to the inflation altering the prices of imported goods

and domestic-produced goods. The instable global commodity price

has a significant impact on headline inflation and food inflation in the

world market due to world commodity price as a result in disequilib-

rium. The exchange rate fluctuations are useful for macroeconomic

stabilization in developing and emerging market economy. The time

varying exchange rate (USD/INR) affects domestic consumer prices

through domestic prices of imported goods and profit margin of

exporters. The exchange rate fluctuations and structural reforms can

help us to strengthen the effectiveness monetary policy transmission

mechanism.

Consequently, the larger exchange rate fluctuations provide

greater disturbance to monetary policy. The monetary authority

always manipulates monetary variables like CRR, SLR, Repo-rate and

Reserve repo-rate to expansions/contractions. Indeed, significance of

the monetary policy transmission mechanism could be strengthened

by enhancing the interest rate pass-through to lending rates. The

monetary policy expects the results to minimize price (inflation) level

in the economy. Bond, Fleisher, and Wood (2003) and Wood (2000)

use the flexible least square (FLS) method to study the time varying

nature of relationship between public approval and presidential suc-

cess in United States. Similarly, Mcavoy (2006) used FLS method to

analysis relationship between the impact of economic and foreign pol-

icy evaluation. The study showed that job performance has varied

over the year. Although Kumar, Srinivasan, and Ramachandran (2012)

use the FLS method to test the assumption of inflation dynamics and

key determinants of slope of the Phillips Curve. Further, there is time

varying between the central bank's preference and the inflation

dynamics.

Aim of this paper is to explore the exchange rate pass-through

and whole price index in Indian perspective. Since 1991, the Indian

economy has opened the exchange rate pass-through all the way into

the domestic market due to change in fundamentals of macroeco-

nomic variables. For instance, the import/export goods and services

from the external economy will cause the domestic economy. In addi-

tion, there is one way to increase the price of external commodities to

increased producer and consumer price. Change in exchange rate

movement pass-through in the domestic market is very crucial, since

there is depreciation of domestic currency and increase in the prices

of imported goods. The empirical research has estimated the time

varying behavior of the exchange rate (USD/INR) pass-through to

wholesale price index to know the significance of the exchange rate

(USD/INR) pass-through and wholesale price index in Indian markets.

Received: 6 January 2020 Accepted: 28 January 2020

DOI: 10.1002/pa.2087

J Public Affairs. 2020;20:e2087. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of6

https://doi.org/10.1002/pa.2087