The Working Paper titled “Phillips Curve Relationship in India: Evidence from State-Level Analysis” is published under the Reserve Bank of India Working Paper Series on July 3, 2017. The paper is co-authored by Harendra Behera, Garima Wahi and Muneesh Kapur.

This paper revisits the issue of determinants of inflation in India in a Phillips curve framework and makes two key contributions in relation to existing studies. First, in the context of the Reserve Bank moving towards a flexible inflation targeting framework based on consumer price index (CPI) inflation, this paper attempts to model dynamics of the CPI inflation. Second, the paper explores the Phillips curve relationship in India using sub-national data in a panel-approach. The estimates in the paper confirm the presence of a conventional Phillips curve, both for core inflation and headline inflation. Excess demand conditions have the expected hardening effect on inflation, with the impact being more pronounced on core inflation. Exchange rate movements are also found to have a significant impact on inflation. Overall, the paper’s findings provide support for the role of a counter-cyclical monetary policy to stabilise inflation and inflation expectations.