Whatever is going on with Indian inflation

The sudden drop in the dollar-rupee exchange rate in March 2017 was seen as a political phenomenon, part of the Trump trade. It was imagined that Trump initiated his 'cheap dollar' policy by calling in his prominent trading partners and arm twisting them into strengthening their respective currencies against the dollar. Different countries reacted differently, some (like China) set up diversions (like the North Korean brouhaha) to get Trump on the back foot, some others (like India) capitulated. The fall of the dollar or the rise of the rupee was seen as a harbinger of the death of inflation. By June-July, inflation was down to 1.3 per cent, the dollar-rupee exchange rate was at 64, and there were bank reports pointing to 61-62 (one bank had 58 as a long-term target). A single one-month tick down, driven partly by the rise of the rupee and the drop in imported inflation, is hardly reason to come to such a consensus. Inflation is not dead, and long live inflation. The government launched a stimulus package and nobody was less surprised than me. The RBI's decision to back away from supporting the dollar was a tactical decision, which was justified in the subsequent commentary by pointing towards the export growth (driven ostensibly by sh

This article was originally published on January 24, 2018.