India’s chief economic adviser expects inflation fears to ease over time
India’s Chief Economic Advisor is not worried about CPI inflation crossing the 7% mark. In fact, he lists some positives for the Indian economy in this conversation with CNBC TV-18.
India’s chief economic adviser, V Anantha Nageswaran, is not worried about retail inflation crossing the 7% mark in August. The CEA attributed the figure to base effects and said the market could overreact to a possible shortage of food crops and prices could react in advance.
“As soon as the market knows that food grain stocks are sufficient and the planting deficit is not as large as claimed, I expect the current spike in food prices to moderate over time. ,” CEA told CNBC TV-18.
During the 1970s, as inflation rose, the expectation of high inflation became entrenched in the economic decision-making of households and businesses. The higher inflation rose, the more people expected it to stay high, and they incorporated this belief into wage and price decisions.
But what are inflation expectations?
This is the rate at which consumers, businesses and investors expect prices to rise in the future. If prices are expected to increase by 3%, companies will seek to increase prices by at least 3%, while workers will expect a similar increase in their wages.
Between 1978 and 1982, the United States experienced its second period of double-digit inflation in less than a decade, prompting Fed Chairman Paul Volcker to raise interest rates to as high as 19%. Volcker caused two massive but brief recessions, and subsequent spending cuts succeeded in calming inflation.
The United States is currently experiencing its worst inflation in four decades, prompting the FOMC to raise interest rates four times in a row. Experts are now predicting another 75 basis point hike at the September meeting and another 50 basis point in November. Inflation data for August in the United States will be released this evening.
Higher interest rates have always led to capital outflows from emerging economies like India. But the CEA is not worried about the Federal Reserve and the quantum of its rate hikes.
“Even if the Federal Reserve continues to tighten, the market will pull through next year. Developed economies are likely to experience an economic slowdown, which will lead to a reversal in monetary policy, and capital flows will therefore shift to regions that offer them the highest yields, and India is one of them,” he said.
To defend or not to defend?
The CEA also spoke on the currency, saying that India is not defending its currency, but the country’s fundamentals are such that the rupee can support itself.
“The RBI ensures that whatever direction the rupee moves in line with market trends, it is gradual and does not impose a burden on importers or exporters,” he said.