We must track trade turbulence amid a benign inflation scenario

India's monetary policymakers will need to calibrate their approach by the potential effects of America's new import tariffs

- NIRANJAN RAJADHYAKSHA

There is now an overwhelming consensus in financial markets that the six members of the Monetary Policy Committee of the Indian central bank will vote to reduce policy interest rates once again at their next meeting later this month. There is ample reason for them to do so. Inflation has been receding for four months in a row. The latest reading of the price gauge shows that inflation is slightly below the inflation target right now.

The Reserve Bank of India (RBI) had held monetary policy too tight through much of the past three quarters, at a time when low core inflation was signaling weak demand conditions in the Indian economy, while high food prices were stoking fears that these could spill over into other parts of the economy. It was a policy paradox. However, the possibility that high food inflation would spread to the rest of the economy seemed unlikely, since neither were wages being pushed up nor were there indications that high prices were spilling over into other sectors.

There are two possible reasons why high food inflation did not light a broader inflationary blaze as it did in the early years of the previous decade, or why it did not spread to core inflation. First, inflation expectations remained stable, so neither did workers begin to demand higher wages nor did companies increase the prices of their products. Second, both sets of economic agents would have liked to bid up prices, but were unable to do so because of widespread slack in the economy.