Inflation scare diluted

COMMENT: Surjit Bhalla, Chairman, Oxus Research and Investment

I actually like the policy, since it shows RBI has not been taken in by the scaremongers when it comes to inflation. Inflation is likely to be trending down and, so, RBI has kept this in mind while coming out with its policy. The important thing to look at is not the wholesale price index, which is a very bad indicator, but to look at the GDP deflator, since that is actually a much better indicator of what’s happening on prices. That shows, for instance, inflation levels for 2009-10 are likely to be in the region of 3-4 per cent. The good thing is RBI appears to be looking at the broader indicators of inflation. At the same time, it has given itself enough room to take action if it turns out that inflation is not getting under control, maybe in another six months or so.

As to whether RBI is behind the curve or ahead of it when it comes to inflation control, a lot depends on what the reasons for inflation are. As in the rest of the world, inflation had also collapsed in India – indeed, the global fear is that of deflation, not inflation (interestingly, some time back, some of the same people who are now talking of inflation in India were talking of deflation!). So, why are things so different in India? When it comes to non-food inflation, which is 75 per cent of the basket, you’ve had negative inflation in the past, so what we’re seeing is the base effect – prices had to rise once growth started picking up, but the negative prices of the past are magnifying the actual inflation. As for food inflation, let’s understand that the current problem is solely to do with government incompetence – not releasing enough foodgrains from the buffer stock for instance – and has little do with anything else. Food inflation will also moderate unless there is a drought or there is more mismanagement by the government. There is the issue of inflationary expectations. My view is that a steady-as-she-goes policy is a good idea, but RBI has room to take action if inflation levels don’t come under control. My own view is that inflation is a story that’s over, and RBI has kept this in mind.