Monday, October 15, 2012

India's stubborn inflation trend puts RBI in a bind - rate likely on hold

India continues to struggle with stubbornly high inflation levels. In spite of slower economic growth, the Wholesale Price Index (WPI) clocked at 7.81% in September, putting the RBI in a real bind. The central bank needs to cut rates as growth has moderated, but it is difficult to do with inflationary pressures unresolved.
The Times of India: - The Wholesale Price Index (WPI) inflation figures are out but those looking for repo rate reductions in the forthcoming October 30 monetary policy announcements by the RBI may be in for some disappointment. According to economists, the WPI figure, though certainly better than the 10%-odd inflation numbers that the economy was totting up till recently, is still not good enough for the RBI to cut rates. In other words, things aren t as bad as before but they are not good enough to merit a growth-inducing repo rate reduction by the RBI.
Part of the issue with India's stubbornly high inflation is that it has been elevated for an unusually prolonged period.
GS: - India has experienced a sustained period of high headline inflation since late 2009. In this period, inflation, as measured by the Wholesale Price Index (WPI), has averaged 9% and has not fallen below 7%. Indeed, the high inflation period can be seen from 2007, with a blip due to the GFC between February and November in 2009. This prolonged period of high inflation has not been witnessed since the early-1990s.
The problem that often accompanies long periods of inflation is the establishment of deeply rooted inflation expectations. Households now fully expect double digit near-term and longer term inflation. The recent rise in food prices is only going to exacerbate these expectations. And as central banks learned from past experiences, inflation expectations create a feedback loop with the actual inflation that is extremely difficult to break. That's why RBI is likely to be on hold for some time.

Source: GS

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