Determinants of Household and Professional Forecasters’ Inflation Expectations in India

Abstract

This study analyses and compares the determinants of inflation expectations among households and professional forecasters in India. To this end, we utilize quarterly survey data from the Reserve Bank of India (RBI), specifically the Inflation Expectations Survey of Households (IESH) and the Professional Forecasters’ Survey (SPF). The analysis employs a non‐recursive structural vector autoregressive (SVAR) model to explore the relationships between variables. The impulse response function and variance decomposition analysis shed light on the response of inflation expectations to macroeconomic shocks. Our findings indicate that apart from conventional macroeconomic factors like realized inflation and monetary policy, exogenous factors such as oil prices significantly shape inflation expectations. Comparing IESH and SPF, we found out that household expectations are more sensitive to shocks related to food prices, reflecting the influence of food expenses on household decision‐making. Conversely, professional forecasters’ expectations are more influenced by core inflation. Finally, we observed that inflation expectations adjust more quickly than realized inflation in response to macroeconomic shocks, suggesting a leading role. This study is novel with the contribution to the existing literature as it provides a comparative analysis of determinants of inflation expectations between households and professional forecasters in India, while also considering inflation targeting as a significant factor.