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Decimal Digest
18 Feb 2013


Mr Governor’s Crocodile Tears

About a fortnight ago, Reserve Bank of India’s (RBI) Governor, Mr. Subbarao had an unusual emotional outburst at a public function, where he mentioned that the poor are the silent sufferers of India’s high inflation, as they do not have a voice in popular media.

India’s inflation, as measured by CPI is running at around 10-11% annual pace for last four to five years. The favoured measure of policy makers for Indian inflation is WPI (Wholesale Price Inflation), which has reduced to below 7% in recent readings after staying above 7% for many years. There are calls to cut interest rates in India based on the WPI movement.

However the inflation that is actually felt by the common Indians is the CPI, and with the CPI in excess of 10% and short-term rates at 7.75%, the Indian consumer is facing negative real interest rates of 3%. There is no attempt by any policymaker to explain the nearly 50% gap between the rate of increase in consumer prices at 11% and wholesale prices at below 7%. At the very least, policy makers can explain the phenomenon to the Indian savers who quietly suffer the CPI rather than WPI.

We wholeheartedly agree with Mr. Governor that the common man in India is suffering silently due to high inflation. What we do not agree is the depiction by RBI that it has nothing to do with persistent consumer inflation. As Milton Friedman has famously said, inflation is always and everywhere a monetary phenomenon. In India, inflation has been supported by unashamed attempts by the RBI to fund the high fiscal deficits of the central government by conducting regular OMO purchases. RBI conveniently describes these OMOs as liquidity management tools. In the first nine months of FY12-13, RBI directly funded nearly 25% of Government of India’s borrowings, as compared to around 10% in the year FY11-12 and virtually zero for nearly fifteen years before that.

The RBI Governor, instead of shedding crocodile tears on the plight of the poor, should stop monetizing the fiscal deficit. Maybe that is the day, like the Mad Hatter of Alice in Wonderland, the poor of India will futterwacken... Vigorously.




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