Column The Asian tightening

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With Tuesday’s 50 bps increase in the repo rate, RBI has hiked the policy rate by 125 bps since June 11, more so than other regional central banks. While regional inflation rates range from 5% in Taiwan to nearly 12% in India, so far this year the central banks of Philippines and Indonesia have hiked the rates by 75 bps, the Thai and Taiwanese central banks by 25 bps while other Asian central banks have remained on hold.

But Asian monetary policies generally appear tighter and more likely to be tightened compared with advanced economies. This reflects generally lower inflation and greater financial fragility in advanced economies than in Asia.

It is well known that consumers in countries with higher income per capita tend to spend a smaller share of their income on food and energy. Hence, the impact of higher food and energy prices on consumer price inflation is smaller.

In addition, the corporate sector of advanced economies is less energy intensive than that of emerging markets: this reflects the smaller share of the manufacturing sector in advanced economies as well as their generally less commodity intensive nature. As a result, a commodities price shock has less of a negative impact on supply in advanced than emerging economies. This is an important difference as oil prices impact inflation much more through the supply side than through demand side—the weight of energy in consumer price indices is much smaller than the share of energy in manufacturing costs. When costs rise, in order to stay profitable, the corporate sector has to lower its output and, to the extent allowed by demand, to raise its prices. That is why the ongoing oil price shock has translated globally into a combination of slower growth and accelerating inflation.