i-rates & Monsoonomics

Latest annual inflation figure for the week ending 21st April came out at 5.77 percent, lower than the expected 5.87 percent. It was lower than the previous months figures of 6.09 percent. The RBI in its annual policy set inflation target of around 4 to 4.5 percent, which seemed impossible. The Finance minister commented that the monetary measures of the government before the policy are the reasons for the decline in the inflation rates. Last week RBI was very confident that there was no need to revise the key monetary rates, the Repo rates and the Reserve ratios.

The RBI must also be good at predicting the weather. Commodity prices like pulses and other agricultural commodities were the main culprits behind the burgeoning inflation. A good monsoon along with bumper crop could actually solve the problem related to inflated food prices. The RBI must have predicted a low inflation on the basis of good expected crop or in other word good expected monsoon.

This gives new twist to the “internationally popular” fisher’s formula. Which says that nominal interest rates are just and addition of real interest rates and expected inflation. Now at-least in Indian context the economists have to also include Expected monsoon next to Expected inflation to perfect the equation.

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