Economy
Economy
international commodity prices exert an important influence on India ’ s inflation . The fuel component of the wholesale price index moves with the international commodity prices .
There are several consequences of high inflation . The conventional view was that high inflation affects growth , and persistently high inflation above a certain threshold level can be a drag on economic growth . Economic research has shown that there exists a statistically significant negative long term relationship between inflation and economic growth in India . Significant inflation-growth threshold
Achieving
Durable Inflation
Given the elevated and persistent inflation , the RBI may need to raise rates to tackle inflation durably , particularly if faced with a persistent and sizable supply-side food price shock putting pressure on broad-based inflation , write V . Srinivas
One of the major objectives of Government of India and the Reserve Bank of India is achieving durable inflation . Inflation in India had reached 10-11 percent in 2008 and remained elevated for several years . Over the past 3 years , inflation has come down from 9.4 percent in 2013 to 5.9 percent in 2014 to 4.9 percent in 2015 to a projected value of 4.7 percent in 2017 . There has been a persistent demand for lowering policy rates . The dilemma is low policy rates are not possible with low inflation . The paper seeks to explore the challenges for RBI to lower policy rates .
The increase in inflation from 2008-13coincided with rapidly rising food and commodity prices . Food prices rose sharply from 2008 and by the end of 2013 had nearly doubled compared to 2007 prices . Food inflation was the key driver of India ’ s high and persistent inflation . Further , effects have been observed in casesv of inflation rates above 5.5 percent . The average growth is higher in States where the inflation was below 5.5 percent and a statistically significant negative effect of inflation on long term growth was visible where inflation was higher than 5.5 percent .
Inflation hurts middle class and poor households quite significantly . Middle class households confronted with high inflation bring forward their purchases of clothing , appliances , houseware or
32 ebZ 2018