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Inflation has external causes

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SummaryIn the first part of this piece (FE, January 23), we had explained how the domestic monetary policy conduct is being increasingly influenced by external factors, as the Indian economy is being closely interlinked with its global counterpart.

last 3 years. Interestingly, the latest round of diesel price increase will actually help inflation rates stabilise in the long term. This also borne out by the recent trends in inflation, which is on a downward trajectory. If we recall, diesel prices were increased by a sharp R5 in September, but the inflation rate based on the WPI has declined from 8.07% in September 2012 to 7.18% in December 2012. Clearly, a staggered increase in the price of diesel will free up productive resources for efficient allocation and this will neutralise the adverse impact in short-run. RBI can join the party on January 29 with a rate reduction to improve sentiments further.

This concludes the two-part series

The author is Director, Economics & Research, Ficci. Views are personal

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