Stagflation ahead? PDF Print E-mail
Saturday, 15 October 2011 00:00
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RBI’s decision will probably make all the difference


Not unexpectedly, WPI inflation at 9.72% was not much below August’s 9.78%. So, going by the statements by various RBI officials, we may see yet another rate hike by RBI later this month. Although RBI is of the view that the demand situation doesn’t show a suitable contraction, most indicators—whether the services or the manufacturing PMI and investment numbers—are screaming red. In which case, this is one of the most important decisions for the central bank—getting a rate hike decision right at this juncture will probably mean the difference between sustainable growth and stagflation. Much of the demand RBI is seeing at the moment is part of legacy momentum—like inflation—and will start slowing further as prospects of jobs keep declining. Not surprisingly, the Prime Minister has called for a meeting of his crack team of economists—C Rangarajan, Montek Singh Ahluwalia and Kaushik Basu—later today.

A few points need reiteration, even if it is for the nth time. One, if food inflation is driven by sharp hikes in procurement prices, there is little monetary policy can do to control this—perhaps a large import plan should have been put in place months ago. Two, with the global crisis getting worse, it doesn’t seem likely that commodity prices will recover—so, despite the depreciation of the rupee, this will start impacting Indian inflation. Three, as many point out, not just our columnist Surjit Bhalla today, inflation has been falling for several months on a seasonally adjusted basis (see Goldman Sachs’ post-WPI data flash)—on a quarter-on-quarter basis, Sachs’ (saar) headline inflation has fallen from 11.3% in April to 6.4% in September, and non-food inflation from 11.3% to 4.8%. It is true that seasonally adjusted data differs from one analyst to another, depending on assumptions made, but the trend looks by and large the same—perhaps it would be a good idea if RBI started putting out its seasonally adjusted numbers since it does do this exercise on a regular basis. The other question RBI needs to ponder over is whether a wage-price spiral (based on its understanding that inflation’s back is not broken) is a more potent threat at this juncture or whether a slowdown-induced fiscal slippage-foreign-liquidity one is more of a danger. Right now, the latter seems more critical.



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