1/12/2015
By Jennifer Coombs

In the wake of interest rate fears in the US this year, it helps to point out how higher interest rates can bring inflation under control, although not without initial pains. India’s inflation was out of control until they elected a new Central Bank chair in September 2013. Inflation rose to 5.0% in December 2014 for the first increase in the last 5 months. Despite this recent increase, the inflation level remains quite low compared to the past couple of years. The red arrow in the chart below denotes when interest rates were raised and kept at 8.0%. The pop in interest rates in December was primarily due to the rise of food and beverages by 5.0% compared to a 3.5% increase in November. In fact, the food index increased by 4.78% in December from 3.14% in November. The cost of vegetables went up 0.58% while fruit prices increased by a whopping 14.84% (13.74% in November). By contrast, price decreases were reported for oils and fats (-1.24%) and sugar (-0.84%). The corresponding provisional inflation rates for rural and urban areas are 4.71% and 5.32% respectively. While this boost is a bit discouraging in the near-term, from a broader view the Indian economy is greatly benefiting from tighter fiscal policy although the initial pain was pretty severe. Perhaps we could learn something.

Jennifer Coombs
Wall Street Strategies

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