Why India's rampant inflation remains a puzzle?

AJMER, India - Oct. 3, 2013 - PRLog -- India's rampant inflation (http://economictimes.indiatimes.com/definition/inflation) remains a puzzle. Without a better understanding of inflation, policymakers are shooting in the dark and could end up making costly policy mistakes with huge unwanted consequences. India's inflation has been persistently high and has risen in the last five years to the highest among all emerging economies, matched only by Vietnam. Global inflation and inflation in all other emerging economies have, in fact, fallen in the last years.

In its latest monetary policy announcement, the RBI has surprised markets by increasing the repo rate on concerns over inflation. Many experts and business groups have criticised the RBI as they assert that inflation is related to supply-side factors - especially in the food sector - and, therefore, tighter monetary policy will have little effect on it. Tighter monetary policy will only hurt growth without helping control inflation.

A complicating factor peculiar to India is the multiplicity of inflation rates. Should one target wholesale (WPI) or retail (CPI) inflation, or core inflation, which is defined as non-fuel, non-food inflation? In the past, WPI and CPI inflation moved closely together, so ambiguity on which rate to focus on was not such an issue. But over the last five years, they have diverged largely due to food inflation (http://economictimes.indiatimes.com/topic/food-inflation) that has a bigger weight in the composition of the CPI.

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