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William Pesek

What Does India Know That the Rest of Asia Doesn't?

The real threat to the region now is deflation, not inflation.
Low inflation and global worries prompted India's rate cut.

Low inflation and global worries prompted India's rate cut.

Photographer: Indranil Mukherjee/AFP/Getty Images

After months of preaching monetary discipline to fend off inflation, Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75 percent from 8 percent. Close observers shouldn't have been surprised. India's central banker, who famously predicted the 2008 global crisis, warned in an op-ed just yesterday that several of the world's major economies were "flirting with deflation," with dire implications for emerging markets like his. The threat of global "secular stagnation" -- combined with lower prices in India -- no doubt prompted him to act.

The question is why Rajan's peers across the region don't appear to appreciate the danger. Just today, South Korea’s central bank courted its own deflationary funk by holding benchmark interest rates steady at 2 percent, even as consumer prices advance at the slowest pace since 1999. While energy costs in Indonesia are rising due to the lifting of fuel subsidies, economist Daniel Wilson of Australia & New Zealand Banking Group warns that prices overall are set to slow or fall: "Disinflation synchronisation is in sight and it will be severe," he says. From Beijing to Bangkok, Asian central banks seem too blinded by longstanding inflation fears to recognize the trends inexorably pushing prices downward.