Expect more trouble when it comes to taming inflation. The new inflation expectations survey of households (for June) released by the Reserve Bank of India (RBI) has nearly 71% of respondents saying they expect inflation to accelerate in the next one year. When seen together with developments in the external sector this adds a new twist to the problems of managing the economy.
Until now, the debate was on how monetary normalization could kill growth. That has changed a bit: the rise in the value of the rupee will dent exports. But if RBI tries to prevent its appreciation, by buying up dollars and releasing rupees domestically, it could end up “importing” inflation.
What should RBI do? Preventing the rupee’s appreciation is a more difficult exercise, given the huge level of inflows from abroad. Focusing on inflation management may be a better option, for now.