India lags China and Brazil in fighting inflation

07/07/2010 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Spahn and Sain and pray for rain was the battle plan for the 1948 Boston Braves. It worked as the Braves won the National League title that year with two dominant pitchers.

It leaves something to be desired as central bank policy, however. Do nothing and hope that the monsoon rains will stop inflation, isn’t much of a way to run an economy. (It’s not very catchy either.) But that seems to be the stance that the Reserve Bank of India has adopted in its fight against inflation.

 Consumer prices are rising faster in India than in Brazil or China, countries where banking authorities are waging conspicuous fights to keep inflation from running out of control. Inflation in India rose at an annual rate of 14% in May. The Indian economy grew at an 8.6% annual rate in the first quarter of 2010.

After doing nothing as inflation built up momentum in early 2010, the Indian central bank has raised interest rates three times since March. But the increases have been just 0.25 percentage points each and haven’t done the job: the economy has reacted as if it knows that the bank is half-heartedly playing catch-up. That’s allowed inflationary expectations to build up in the economy.

The bank is widely expected to raise interest rates again at its July 27 meeting—but also widely expected not to take dramatic action.

Inflation in India picked up last year after an unexpected drought led to shortages of rice and wheat that sent food prices climbing.

Now the Reserve Bank seems to be pinning its inflation-fighting strategy on plentiful rain during the monsoon season that starts in June and runs into September. The monsoon rains are the major source of irrigation water for most of India’s farmers.

The national weather service has forecast adequate monsoon rains this year. But then again the service didn’t predict last year’s drought.

So far at least the government seems to be in luck: the monsoon season has started with rainfall across the country.

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