Rajan's Next Challenge: Winning Over India's Moms and Pensioners

  • Inflation expectations vary across demographics, geographies
  • Containing these crucial to Rajan's 4% inflation target

To win India’s inflation war, central bank Governor Raghuram Rajan needs the support of unlikely allies: housewives, pensioners and laborers who toil for a daily wage.

They see prices rising about 11 percent or more in a year, faster than the current 4.4 percent pace. Expectations also vary across geographies, ranging from 7.2 percent in the tech-city of Bengaluru to 15 percent in former Communist-led Kolkata and 16 percent in mountainous Guwahati. Food plays a key role, with almost 90 percent of respondents saying those prices will increase. 

While it’s common for consumers’ perceptions to be higher than published numbers, the challenge for Rajan is to make sure both fall in sync as he seeks to bring inflation durably down to around 4 percent by March 2018. Households’ expectations have inched up for three quarters in a row, reducing room for further interest-rate cuts this year.

“Food prices have a really big bearing on inflation expectations," said Shilan Shah, a Singapore-based India economist for Capital Economics Ltd. "It’s part of the reason we think the RBI might actually turn slightly more hawkish from now."

Convincing all Indians that prices will rise only gradually helps moderate their wage demands and contain overall inflation. Complicating the task is a recent surge in the price of pulses, which followed a jump in the cost of onions, both staples of Indian meals.

Years of 9-percent-plus price growth has left its mark on Indians, Rajan has said. When surveyed, households tend to answer based on the last item they bought, such as pulses, milk or eggs.

“It’s salient stuff which stays in their mind and they say ‘oh my God this has gone up so much!’" he said in an interview to NDTV on Thursday. "Much of what they pick out typically has some fluctuations, they go up but they also come down -- they don’t really seem to pick up the down phase."

The Reserve Bank of India doesn’t necessarily look at the absolute level of expected inflation but is more concerned with the direction and magnitude of moves, officials have repeatedly said.

The RBI’s Sept. 29 survey of 4,903 urban households show that housewives -- who comprise 29 percent of respondents -- expect a 100 basis point jump in inflation over the next 12 months compared with those in the financial sector who predict just a 40-point increase.

Consumer prices probably rose 4.85 percent in October from a year earlier after a 4.4 percent increase the previous month, according to the median of 14 estimates in a Bloomberg survey of economists.

“Price spurt in key items is standing in the way of household inflation expectations falling,” said Pranjul Bhandari, a Mumbai-based economist at HSBC Holdings Plc. “If we are able to arrest spikes in specific items over the next couple of months, we could start seeing the impact.”

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