Expert Zone

Straight from the Specialists

Why inflation is so persistent

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Inflation has been high for nearly four years and has not responded to the policies of the Reserve Bank of India or the central government. This is because the kind of inflation that we have is of an unusual variety and cannot be checked by conventional means.

It is important to look at the numbers. In July, the consumer price index (CPI) was up 8 percent and threatens to crawl up further after a deficient monsoon. That’s because 68 percent of the increase in CPI comes from food.

In the food basket, the prices of vegetables, fruits and milk have jumped the most. Together, this accounts for 31 percent of food inflation. Of these, vegetables were responsible for the entire increase in July’s CPI.

Vegetables and milk are critical components of CPI and an adequate increase in supply to cover higher demand can make all the difference. Demand should not be curbed in the interest of a healthy diet. This is also true of other nutritious food such as meat and eggs. Since production was slow to grow, a demand-supply gap has emerged. Inflation is all about that.

Why the RBI raised interest rates

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The Reserve Bank of India (RBI) raised interest rates at its review on Jan 28. The justification usually given for doing so is inflation.

But at its previous review, when inflation had soared, the RBI was passive and left rates unchanged. Now, with wholesale price inflation (WPI) slowing to 6.16 percent, the RBI was quick to raise the repo rate by 25 bps back to its highest level since the 2008 crisis. Why?

Which inflation should the RBI target?

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The Reserve Bank of India (RBI) is entrusted with the responsibility of maintaining price and financial stability, and it has used interest rate and money supply to pursue this objective with unwavering determination. Yet, inflation has survived with matching persistence.

The index that the RBI uses to target inflation is the wholesale price index (WPI), which is the combined price of a commodity basket comprising 676 items. A few prices in this basket can be too volatile or outside the scope of the RBI’s monetary policy, leading to poor results.

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