Tackling India’s inflation and policy
Mains Paper 3: Economy
Prelims level: Inflation
Mains level: Inclusive growth and issues arising from it
- Inflation based on consumer price index (CPI) has surprised
analysts on the downside.
- Data released last week showed that inflation for the month of
October was at 3.31%.
- Analysts expect headline inflation to remain low in the coming
months as well, partly because of lower food prices.
- Global crude prices have also come down recently and should help
keep inflation in check. The headline inflation number should please both
the government and the Reserve Bank of India (RBI).
Inflation in under control
- It is actually remarkable that inflation remained muted despite
the sharp jump in crude prices this year.
- Its holding at lower levels for an extended period will improve
India’s policy credibility and strengthen macroeconomic stability.
- Though low inflation is desirable, it currently masks a fair
amount of policy complexity, both for the government and the central bank.
- RBI deputy governor Viral Acharya in the October meeting of the
monetary policy committee (MPC), for instance, noted: “Since the August
policy, food inflation has surprised dramatically on the downside.
- Seasonal pickup in prices of vegetables and fruits in summer
months was simply missing due to a combination of increased mandi arrivals,
export policies and other supply management measures.
- This, coupled with a normal monsoon, has shifted RBI’s food
inflation projections significantly downward.”
Observations by MPC
- The MPC, in its October meeting, decided to keep policy rates
unchanged and changed the stance to calibrated tightening, which basically
means that the possibility of cutting interest rates is off the table for
- This newspaper had argued in favour of increasing the policy rate
in light of rising crude prices and the falling rupee.
- Those risks have come down, but the MPC would do well to remain
- There is still a fair amount of uncertainty on the crude front and
prices could reverse with the proposed cut in production by the Organization
of the Petroleum Exporting Countries and rising geopolitical tension.
- The rupee has strengthened from its lows, tightening of financial
conditions in global markets and the expected increase in interest rates by
the US Federal Reserve will continue to put pressure.
- Markets now expect the MPC to keep rates unchanged in the December
- However, if inflation continues to surprise on the downside in the
coming months, it is likely that the clamour for lower rates will rise.
- This will pose a policy dilemma. Aside from the fact that core
inflation continues to remain high, a narrowing interest rate differential
with the US will affect capital flows.
- Though it makes sense for a central bank in its early days of
inflation targeting to be cautious, it should be prepared to face some
criticism for keeping the real rates at higher levels.
- Therefore, while it is good that inflation is under control and is
likely to remain so in the foreseeable future.
- The policymakers will need to address the challenges posed by it
so that it is durable and aids economic growth in the medium to long run.
Q.1) Which of the following are not correctly matched?
1. Lorenz Curve – Poverty estimation
2. J Curve – Taxation
3. Laffer Curve – Devaluation
4. Philip’s Curve – Inflation and unemployment
Select the correct answer:
a) 1 only
b) 1 and 2 only
c) 1, 2 and 3 only
d) All of the above
Q.1) Will low inflation benefit the Indian economy?