October 17, 2018

The great Indian inflation puzzle

Research Director and Senior Fellow, Niranjan Rajadhyaksha writes in Mint on the inflation puzzle. Excerpts below:

 

"The monetary policy committee (MPC) surprised the financial markets once again in October. Five of its six members voted to leave policy interest rates at current levels even though it switched its stance from neutral to calibrated tightening. Only Chetan Ghate voted for a rate hike while Ravindra Dholakia voted to stick to the neutral stance. Most polls of the private sector economists had shown an overwhelming expectation that interest rates would be raised for the third time in a row. The MPC majority thought otherwise.

 

There is a deeper puzzle here. The Indian central bank as well as the economists it surveys expect consumer price inflation to come down in the months ahead, before rising once more. This is perhaps the first time in recent memory when Indian inflation is expected to be muted despite higher global oil prices, a weaker rupee and a poor monsoon. They are usually the catalysts for accelerating inflation. The Reserve Bank of India (RBI) inflation forecast model broadly estimates that a 10% increase in oil prices pushes up inflation by 20 basis points. There are two forces at play. Higher oil prices feed into input costs across the economy while they also have a smaller disinflationary impact because of lower aggregate demand. 

 

The baseline assumptions used by the RBI have changed since April. The Indian crude oil basket is now assumed to be at $80 a barrel rather than $68. The exchange rate used in the forecast model is ₹72.5 to a dollar rather than ₹65.5. The monsoon is 9% below the long period average compared to the April assumption of a normal monsoon. This is a combination of factors that should usually send inflation shooting up. What is happening?"

 

Read the full article here.

Topic : State Capacity / In : OP-EDS
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