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HindustanTimes Wed,27 Aug 2014

Inflation is no more rate-bound

HT Correspondent, Hindustan Times  New Delhi, March 20, 2013
First Published: 20:47 IST(20/3/2013) | Last Updated: 01:58 IST(21/3/2013)

Inflation is not what it used to be. And the reason for its new, persistent highs may lie more in the procurement policy of the government to aid farmers and shifting consumer preferences in a developing economy rather than textbook talk of money supply.

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As policymakers look for options to reverse a widespread deceleration in the broader economy, the UPA government and the Reserve Bank of India (RBI) are perhaps facing http://www.hindustantimes.com/Images/Popup/2013/3/21_03_13-buss23.jpgtheir biggest macroeconomic reality: the RBI's bitter medicine to keep interest rates high has not tamed prices, but crimped growth. And the reason may lie in the “new normal” of inflation.
On Tuesday, the RBI announced a 0.25 percentage point cut in the repo rate — the rate at which banks borrow from the central bank — a move aimed at pushing banks to slash lending rates. A lower repo, which now stands at 7.50%, brings down banks’ borrowing costs, which in turn, prompts them to slash interest rates for final home, auto and corporate borrowers.
However, interest rate management may not be the most effective tool to combat inflation, say experts.
A rise in government-administered minimum support price (MSP) for foodgrains and an emerging pattern in food consumption largely explain the rise in food inflation

Consumer price index (CPI)-based inflation - a more realistic cost-of-living index because it captures shop-end prices -  rose to 10.9% in February from 10.8% in January, driven largely by increase in prices of categories such as cereals, eggs, meat and fish, where price changes are gradual, less volatile and likely to be sustained.

“From an inflation perspective, upward revisions in the minimum support prices should warrant caution in view of their implications for overall inflation,” the RBI said in its mid-quarter review on Tuesday.

As millions shift to higher standards of living, the focus is changing from basic needs of nutrition to more aspirational products like protein rich eggs, meat and fish.

Data over the last few years shows prices of protein-rich food items such as pulses, milk, eggs and fish have risen faster that overall food prices. At low levels of per capita income, carbohydrate-rich diets, based on cereals such as wheat and rice, dominate protein-based diets. This is showing signs of reversal with rising incomes.

Experts reckon that for a variety of welfare schemes such as the National Rural Employment Guarantee Act there has been a rise in rural wages, prompting higher sales of “urban” goods.

“Once we recognise that rural consumption demand has changed to the extent that people in rural areas are demanding stuff that they did not consume earlier, we have to take a serious relook at our conventional approach to price management,” said Pronab Sen, former chief statistician of India.


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