deepak mohanty : changing inflation dynamics in india speech by mr deepak mohanty, executive director of the reserve bank of india, at the motilal nehru national institute of technology ( mnnit ), allahabad, 13 august 2011. * * * the assistance provided by abhiman das, sanjib bordoloi and manjusha senapati is acknowledged. i thank the motilal nehru national institute of technology ( mnnit ) for giving me this opportunity to address this distinguished gathering. i propose to speak on inflation which is a matter of concern to all of us. what is inflation? simply put, inflation is the sustained increase in the overall price level. relative change in prices of goods and services is a desirable attribute of market economy as it reflects productivity changes as well as demand and supply conditions. however, when this process transforms into an acceleration of the overall price level, we need to worry as inflation imposes many socio - economic costs. the headline wholesale price index ( wpi ) inflation averaged 9. 6 per cent in 2010 – 11 as compared with 5. 3 per cent per annum in the previous decade. similarly, the average consumer price inflation, measured by the consumer price index for industrial workers ( cpi - iw ), was even higher at 10. 5 per cent in 2010 – 11 as compared with 5. 9 per cent per annum in the previous decade. moreover, this elevated level of inflation also persisted through the first quarter of 2011 – 12. in response to inflationary pressures, the reserve bank has raised the policy repo rate 11 times bringing it up from a low of 4. 75 per cent in march 2010 to 8. 00 per cent by july 2011. it is expected that inflation should come down towards the later part of this year. why has inflation been so high and persisted for so long? this is the theme of my talk today. in my presentation, i propose to address the following questions : is india an outlier among major countries in terms of recent inflation performance? has the inflation process changed? what are the causal factors – global and domestic as well as supply and demand? i will conclude with some thoughts on managing the inflation dynamics on the way forward. is india an outlier in the inflation performance among major countries? it is important to appreciate the global backdrop in which we are experiencing a resurgence of inflation now. in the last decade, inflation was low, both in advanced countries as well as in emerging and

, financial flows to commodity funds typically increase with higher commodity prices further accentuating price pressures. bis central bankers ’ speeches from global factors, domestic factors have had a significant influence on the inflation trajectory in india. has the inflation process changed? in india, we have multiple price indices – 6 consumer price indices and a wholesale price index ( wpi ). while the reserve bank examines all the price indices both at aggregate and disaggregated levels, changes in the wpi is taken as the headline inflation for policy articulation. within the wpi, non - food manufactured products inflation is considered the core inflation3. going by any measure of inflation, india comes out as a moderate inflation country, though occasionally inflation crossed the double digit mark. the historical average long - term inflation rate was around 7. 5 per cent. but significantly, there was substantial moderation in inflation in the 2000s. the annual average inflation rate was around 5. 5 per cent irrespective of the inflation indices taken, whether wpi or cpi. this raises the question : did the inflation dynamics change in the 2000s? monthly wpi inflation data suggest that there was a structural break4 around the mid - 2000s with the inflation rate during the latter half being higher ( chart 1 ). average wpi inflation increased from 5. 2 per cent in the first half of 2000s to 5. 5 per cent in the second half. this was largely contributed by primary food inflation. in fact, the core nonfood manufactured products inflation moderated from 4. 2 per cent to 3. 9 per cent. what did cause the structural break in the mid - 2000s? a disaggregated assessment suggests that protein items largely contributed to this change in trend ( table 3 ). core inflation is generally estimated by excluding volatile food and fuel components from the headline inflation, though there are various statistical methods of estimation of core inflation. analytically, core inflation is considered as an indicator of demand conditions. estimated by bai - perron test. bis central bankers ’ speeches not only did the average food prices rise during the second half of 2000s but they were more volatile ( table 4 ). structural food inflation food prices being subject to supply shocks tend to be volatile. for example, the performance of monsoon has a significant bearing on the trend of domestic foodgrain prices. spikes in food prices normally subside as they are transitory. however, empirical analysis suggests that inflation in protein items has become persistent. 5 this suggests that