This is another article by guest author KRG. KRG heads the treasury function of a leading Indian financial institution. He is based at Mumbai, India
P Chidambaram, the Indian Finance Minister, made a few statements (repeated below) recently :
- Inflation is a monetary phenomenon
- Monetary Steps do not have much impact on Fuel, Food prices
- RBI has direct responsibility for price stability
- Current Inflation rate rise driven largely by primary articles
- Govt will take Fiscal, Monetary; Supply side measures to control inflation
If this is looking confusing, let me rephrase it [including what is not said but what I have read, in bold and blockquotes], in my own words:
- Inflation cannot and will not be tolerated especially now
it is fast becoming an electoral issue and so says the powers that are
- Inflation is monetary in nature,
i.e., by and large it always is, Is it not? Everyone knows this!
And therefore…
- RBI has been tightening and higher price of money would hopefully bring down credit
and in any eventuality, they will explain, as they are directly responsible
- But don’t forget the non-monetary nature of inflation and the supply side dynamics…
there are cartels out there and hoarders, the shortages may be cyclical in nature, or may deliberately created by some profiteers
- Current inflation does not seem “monetary” in orientation
hence Govt has to do other things, but this does not mean that RBI can risk easing up its stance, since basically inflation is a monetary phenomenon
…but if inflation has a strong non-monetary nature and the current inflation is non-monetary, is RBI over-reacting? Can we have some serious research from RBI and/or Govt on how much of the inflation is non-monetary in nature instead of these confusing verbal justifications?
- Govt will take whatever steps required on Fiscal, Monetary and Supply fronts…
Will try to cut taxes, will try to curb expenditures and will try other measures such as price controls, export/import controls, subsidies, moral suasion etc….
“etc” means that I can’t think of anything else, but may be you could.
Not that this rephrasing helps much, but here are my two bits on inflation.
To start with, I am not very erudite on the matter of inflation (or for that matter on any other matter!!). But I would like to see RBI and/or Govt economists getting into the nitty-gritty of inflation, i.e., study the individual items in the WPI basket, the relevance of their existing weights, current supply/ demand/price/market factors and then look at the possible policy measures. And perhaps extend the study into bringing out a PPI (I am told that this is more scientific) as an inflation measure. Then may be Govt can assign the whole work of revamping the WPI or building a new PPI to some entity well versed in research and surveying (may be RBI could take over this activity); While we are at it, may be we could shift to a more recent base year and officially introduce a concept of core or manufacturing inflation (excluding food and fuel).
But the extent and the aggressive tone of inflation-speak are making me uneasy. If we assume that there are no skeletons in the WPI cupboard, the base effect itself should start easing the headline number after April. CPI is high, but let us remember that for long periods the CPI was very low, so there could be a predominance of base effects. The strong measure on CRR would start working its multiplier-way on the credit growth etc. Meanwhile, there are signs of a US if not a global slowdown. Then, why all this aggressive talk?
Is this in preparation for a massive revising of the index for some past period (the average revising has been at least +25 bps)? Has some item been missed out (the iron ore episode stands out!)? Or is it a genuine concern on the monetary growth coupled with supply inelasticity coupled with electoral issues coupled with the aggressive tones of ECB/BOJ et al?
Yet another worry is that, whatever be the reason, the heightened concerns of the authorities means that RBI might continue to be defensively “tight”, perhaps even much after it is necessary. This policy risk does not augur well for the domestic asset markets, for this also implies that the interest rates would peak much later than in other markets and also that the cyclical rate cuts would be in huffs and puffs and bits and pieces.
Previous posts by KRG can be found here (1)
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