Inflation is low but what about its expectation?

Few days ago the Governor of RBI made a startling statement when he encountered a question by the journalist he said, " I don't know what you want to call me... Santa Claus... you want to call me a hawk, I don't know. I don't go by this. My name is Raghuram Rajan and I do what I do." This statement further solidified his claims for the most stringent Monetary policy this country has even seen. Over the past few months, Mr. Raghuram Rajan was able not only to curb inflation to a record low but also he was ahead of his stipulated time. Moreover, he came out to be a strong Central Banker in this regard. He delivered what he said when he first came to office two years ago. Although, there are some major changes in the way we look at Inflation now, i.e, Changing of the measure of Inflation from WPI to CPI marked an early success story yet the menace of inflation is all the same. Further, with the slightest cooperation from the central government he managed to deliver at times, what was necessary when  nearly every part of the world is facing a crisis of some sort.

             Moreover, the gradual shift of Central Bank to use interest rate targeting rather than inflation targeting had an important role to play in this whole saga of the Inflation war. But, there is one thing which needs to be taken care of and even a majority of the newspaper have not mentioned it. Although, inflation is contained, but we Economists know what role Expectation has to play in the containment of inflation. Expectation enters the picture when you look at the way inflation is being targeted right now. Using the Taylor rule,  we began targeting the interest rates but with this the expectation of inflation entered the picture. Now if the expectation of inflation turns out to be high we will keep a higher interest rate to tackle it ( which is why he never lowered the interest rates) and when the expectation of inflation turns out to be lower we can go for a lower interest rate. In short we have to keep the real interest rate constant pegged to a fixed value.

           Amidst everything, the point of prominent notice is the how the expectations are formed at the first place. Expectation about inflation gets affected by lot many things such as  the price of oil, Food items, External situations, Worldly affairs etc. Now, when in past few days market seemed bullish reviving the growth projection for the upcoming quarter sends a strong signal to the World that India is ready to embark upon it's glorious chapter of a sustained growth story which seems viable even from the  perspective of long-run. Given some global turbulences as the greek crisis, china's action of devaluation, US fed's actions, Indian monetary policy is at its strongest phase now and will continue to write the growth story. This ensuring that the expectation of inflation would be lower in the upcoming days 

            C Rangarajan, the former RBI governor who Rajan had quoted in the past for his inflation-fighting stance, said that if warranted, inflation-targeting will get discarded when things are not going in the right direction. “When you are not sure what will happen, it is best to frontload rate cut action,” he said. Thus, we can say that the long wait to have a rate cut of 50 bps is more than justified. Now all we have to do is expect a low level of inflation in the coming years which I think will be, given the credibility of Governor, RBI after all now we know Who he is and what he does.