Recently, some of the economies such as Indian and Chinese started witnessing good trends as far as inflation is concerned. China's inflation fell sharply in February 2012 to a 20-month low of 3.2%. In India, inflation too broke the shackles of 9-10% levels and came down to around 7.5% level during the month of January 2012. All this was expected to give the respective governments more leeway to stimulate their slowing economies. The Indian apex bank Reserve Bank of India (RBI) was also expected to ease its monetary stance.
However, recently released United Nation's food index data may force these countries or their government agencies to rethink before taking any expansionary fiscal or monetary measures. As per the United Nation data, global food prices rose by 1% on month-on-month basis in February 2012. This was second consecutive monthly rise in the global food prices.
Well, some economists believe that it is just a short term trend. In their view, this shooting up of the food prices is mainly on account of major buying interest from Iran. Iran is currently paying a premium for food items in the light of tough stand taken by the western countries against it. Looking at the global food production forecasts, economists expect that FY13 would witness comfortable food prices as compared to FY12.
But this is just an expectation. That too mostly based on good weather assumptions. Reality is that food prices are going up. And it is not just food prices. Price of one of the most important commodities, crude oil, is adding to woes as well. And looking at the Iran unrest, it does not seem to be easing off soon. All this definitely does not augur well for the India economy which has been struggling with stubborn inflation for quite some time now.
Now the policy makers would be facing a great dilemma when they sit for deciding on monetary policies. High interest rates have already hurt the pace of the Indian economy to the extent that we are now talking about sub-7% growth rate. However, in the scenario of rising food and oil prices, easing monetary policies may again propel inflation figures northward.
This presents a great dilemma for RBI. What RBI is going to choose? A little slowdown in the near term with controlled inflation. Or easing out liquidly and lowering interest rates in order to bring the growth momentum on track. We would come to know soon.