By the Blouin News Business staff

India’s inflation remains irrepressible

by in Asia-Pacific.

Indian farmers plough a field in preparation for sowing cotton seeds.

Forces of inflation. Photo credit: AFP/Getty Images/Sam Panthaky

One way to look at the Reserve Bank of India’s quarter of a percentage point cut in interest rates announced Tuesday is that inflation is so irrepressible in India that a rate cut will make little difference to rising prices in the near term. So the central bank had little to lose in bowing to the finance ministry’s pressure to boost growth by lowering borrowing costs for the first time in nine months.

The decline in the wholesale price index from 8.1% in September to 7.2% in December and in the headline consumer price inflation rate to a three-year low of 7.2% give the bank a tiny economic fig-leaf behind which to hide. But still with some embarrassment. Its comfort range for inflation is 5%-6%. The bank’s governor, Duvvuri Subbarao, has hinted that inflation will have to get down to that range before there can be any more rate cuts.

Dont’t hold your breath. Regardless of what Finance Minister P. Chidambaram’s next budget brings in late February to tackle India’s high current-account and fiscal deficits, both food and non-food price rises will remain high in the coming months. How high will depend in good part on how vigorously the deregulation of diesel prices is pursued and what happens to world oil prices. Bringing down food inflation requires structural reforms to the country’s farming so that there can be the necessary investment in agrarian productivity. That is a political third rail in a country where 800 million people, nearly three-quarters of the population, live in the countryside.