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Decimal Digest
27 Feb 2012

India Inflation: Confirmation of Change in Direction

We had alerted our readers on 4th July 2011, that in spite of the mood of headlines at that time, inflation in India should start easing soon. The link to that article can be found

Now, the latest numbers for CPI in India are lowest since early 2008. What is more important, the gap between four-year inflation and one-year inflation is the biggest since May 2001, as shown in the table below:

It is unfortunate that RBI had been unable to detect this major change in the dynamics of Indian economy. The high interest rates, and tight liquidity policy followed by RBI during the whole of 2011, and its successful, but unnecessary, attempts to prevent Rupee depreciation, fearing that it would lead to imported inflation, have resulted in loss of competitiveness for the Indian economy, both internally and externally.

We have reasons to believe that the wrong policy prescriptions doled out by the RBI, coupled with external shocks coming in from the euro zone and the Middle East are likely to lead to further deceleration in the Indian GDP growth in the coming quarters.


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