India's Stubborn Inflation Trend Puts RBI In A Bind
Sober Look | Oct 16, 2012 03:24AM ET
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.
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.
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