The language of economics may have converged, globally, but political sensitivities in poor countries still differ from those in rich economies. One of the most important questions India?s central bank has had to tackle before daring a decision on cutting interest rates, therefore, is whether its tight money policy has been able to temper down inflation as intended. Overall, Wholesale Price Index (WPI) figures reflect some softening in the rate at which prices are rising. Average WPI inflation over the fiscal year so far?from April 2007 to January 2008?has been 4.3%. This is comfortably below the 5% target for the year, and signifies a descent from a peak of 6.4% at the start of 2007-08. In itself, from point to point, this qualifies as a success. Quarterly review after review of RBI?s monetary policy has made a point of price stability acting as an anchor for sustainable economic growth, and so everyone should be pleased. With the risk of an overheated economy out of the way as a danger, policy can focus on spurring growth.
But is inflation no threat at all? A closer look at the WPI inflation trend reveals that since touching a low of 3.1% in October 2007, it has steadily picked up, reaching 3.8% in the first two weeks of January 2008 in spite of the moderation in food prices brought by a good agricultural harvest. The cause has been traced to fuel prices, even without an upward price revision to reflect an international oil spiral. Could such a revision ruin the present scenario? Also, what about tightening grain markets internationally? As direct worries go, these two factors cannot be dismissed. But there is also reason to believe that their impact can be cushioned to keep WPI inflation within the central bank?s 5% limit. Farms are becoming more responsive to demand in a domestic context. The oil pool ripple is likely to be limited this time around. The prices of manufactures, for example, seem more tractable now than about a year earlier. While investment goods like cement and steel firm up, most other industrial output has seen a declining price trend, thanks to effective demand management. Consumption goods are in check, too. Supply conditions are also good. Or at least better than in early 2007-08. All factors considered, the RBI has sufficient leeway to cut interest rates without fearing an inflationary relapse.
