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Inflation expectations higher than they were during last boom

LiveMint logoLiveMint 03-10-2017 Livemint

The chart shows that average inflation expectations were much lower in 2006-07 and 2007-08 than they are now, although actual inflation is lower. Ironically, 2006 to 2008 were boom years.

The years of low inflation from 1999-2000 to 2005-06 is what shaped inflation expectations in the years immediately following. Conversely, the years of high inflation between 2009 and 2014 have led to high inflation expectations remaining entrenched.

Minutes of the monetary policy committee meeting in August show that Michael Patra, Viral Acharya and Urjit Patel were worried about median inflation expectations moving higher in the June survey, although the difference was slight and average expectations for one year ahead had actually fallen a bit.

The Urjit Patel committee on monetary policy had approvingly quoted Raghuram Rajan’s statement on taking charge as governor of the Reserve Bank of India (RBI): “The primary role of the central bank, as the RBI Act suggests, is monetary stability, that is, to sustain confidence in the value of the country’s money. Ultimately, this means low and stable expectations of inflation.”

Unfortunately, inflation expectations are still considerably high in India. Will RBI cut its policy rate despite that?

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