It is widely known that consumer price inflation has come down sharply over the past three years. The reasons for this disinflation are less known. A new International Monetary Fund working paper by Sajjid Chinoy, Pankaj Kumar and Prachi Mishra provides some important insights.
The three economists show that lower global oil prices played a relatively small role because domestic fuel prices did not come down that much. They instead argue that two other factors have been more important drivers of disinflation—the moderation of inflation expectations and the rationalization of minimum support prices for farm output. The implicit takeaway is that credit has to be shared by the central bank and the Narendra Modi government.
Inflation expectations are notoriously sticky in India, partly because they are also adaptive, or backward looking. It is thus important that the new monetary policy committee does not take inflation psychology lightly.