RBI urges steps to curb inflation
Mr Deepak Mohanty, Executive Director of the Reserve Bank of India addressing at the S P Jain Institute of Management & Research said each possesses within himself two antagonistic and foolish counsellors, whom we call by the names of pleasure and pain…besides these two, each man possesses opinions about the future, which go by the general name of expectations; and of these, that which precedes pain bears the special name of fear, and that which precedes pleasure the special name of ‘confidence’.
I thank Dr. Sesha Iyer and Dr. Pattnaik for the invitation to address this young audience. In monetary analysis and policy, inflation expectations play a pivotal role. Recently, in many advanced economies, central banks have substantially expanded their balance sheets, which is apparently inflationary. However, central banks in these countries allay the inflation concerns by indicating that, despite substantial mone- tary easing, medium-term inflation expectations remain well anchored. One inference, therefore, is that inflation in future is unlikely to go up if inflation expectations do not go up. In India, we have the opposite problem: elevated current and expected inflation constrains the Reserve Bank in substantially easing monetary policy. This suggests that central banks, assign a significant weight to inflation expectations in their monetary policy assessment. How does one define “expectations” which is a behavioural and psychological concept and apply it to economics and practical policy making? This is the theme of my talk today.
I will sequence my presentation as follows: first, I briefly review the theory and practice of defining inflation expectations; second, discuss the measures of inflation expectations; third, analyse the measures of inflation expectations in India; and finally, conclude with some thoughts on enhancing our understanding of the inflation process and expectations.