Can QE Work in India With 7% Inflation?
Unconventional policies would help fight stagnation even as rising prices narrow scope for more rate cuts.
There may be too much food in India’s inflation basket.
Photographer: Indranil Aditya/NurPhoto/Getty
The anguish is palpable. First, it was the news that India’s nominal gross domestic product is growing at its slowest pace in more than four decades. Now comes the inflation data for December, showing the steepest rise in consumer prices since July 2014. If this is the onset of stagflation, then it will be very hard to beat back the blues. But is that what we’re seeing?
The risk of economic stagnation combined with high inflation has indeed risen, though the former remains the dominant force. For the central bank to get nervous and switch prematurely to a hawkish stance would be a grave error. Even if it can’t reduce interest rates any further this year, the Reserve Bank of India should keep quantitative easing among its options for supporting the economy.