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Informist, Wednesday, Jul. 23, 2025

 

NEW DELHI – Inflationary expectations of Indian households show a systematic upward bias even in periods of stable or low inflation, a study by the Reserve Bank of India's staff said. "While headline inflation is more influential than food inflation, volatile and broad-based food inflation may keep overall expectations elevated, underscoring the importance of continued policy emphasis on headline inflation," according to the study. 

 

Even during periods of low headline inflation, higher food inflation can hinder easing of inflation expectations, the study said. "Conforming to their global counterparts, during periods of high inflation, Indian households focus on volatility rather than merely increase in food prices," it said. 

 

In the past, there have been calls for India to target non-volatile core inflation rather than headline inflation. The Economic Survey for 2023-24 argued that India's inflation-targeting framework should consider excluding food inflation, as higher food prices are often not demand-induced but supply-induced. Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth, it said, adding that it is "worth exploring whether India's inflation targeting framework should target the inflation rate excluding food".

The central bank, however, has maintained it is focused on anchoring headline inflation.

 

The study said that the central bank's flexible inflation targeting framework has "successfully" aided in stabilising inflation expectations. "Monetary policy actions are found to effectively anchor inflation expectations," it said. 

 

The RBI's Monetary Policy Committee had kept interest rates unchanged between March 2023 and January 2025 as high food prices had made it challenging for the headline inflation print to align with the target of 4%. However, since February 2025, the rate-setting panel has lowered the policy repo rate by 100 basis points to 5.50%, as the inflation outlook has turned benign, with food prices remaining under control. "... most recently, as inflation has been showing signs of easing, expectations of households have also come down," the study said. 

 

The study also found that perceived past inflation experiences add to the stickiness in household inflation expectations. "Simple decision-making rules stemming from habit formation may distort expectations, causing households to overreact or underreact to new information.  End

 

Reported by Priyasmita Dutta

Edited by Saji George Titus

 

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