Why RBI is unable to bring down inflation expectations – its roots lie in rural areas

...........The problem, as former RBI Deputy Governor Subir Gokarn acknowledges in an article in Business Standardtoday (28 July), is that inflationary expectations continue to remain high despite a fall in the indices. The only time in the last few years when inflationary expectations dipped was in 2008 – thanks to the global financial crisis and the sharp drop in commodity prices. But that was a fluke. Policy – fiscal nor monetary - did not impact inflation at all. Quoting from the RBI’s household inflation expectations survey, Gokarn says that urban inflationary expectations “rose steeply as the (2008) crisis appeared to abate and then remained in the 12-14 percent range for a long period before rising further to the 14-16 percent range over the last couple of quarters until March 2014. During this period, monetary policy was contractionary, going by the increase in the repo rate….except for the first three quarters of 2013, which coincided with the rise in expectations.” Put simply, Gokarn is saying that monetary policy has not been able to douse........

Read........