Chart of the Day: Indian households still worried about inflation

Ever since the Reserve Bank of India indicated that it would withdraw monetary accommodation and started raising the policy rates, household inflationary expectations have tempered slightly. But expectations still remain elevated and their persistence at current levels would be troubling for the RBI.

As the chart shows, the latest round of household survey by the central bank shows that inflation is expected to moderate albeit marginally over the next three months and even a year ahead. Note that the moderation expected is quite small. To be sure, sub-components of the expectations index suggest that majority still believe prices to rise in the coming year.

Notably, more than 80 percent believe that food prices would remain elevated. Household expectations are adaptive, an observation made by the former RBI Governor Raghuram Rajan. Therefore, persistent inflation pressures tend to make Indians expect the worse on price levels going forward. As inflation eases in the coming months, expectations too are likely to moderate.

That said, with headline retail inflation likely to remain above 6 percent this year, it would be a long time till Indian households begin to believe that prices would come down consistently. That makes monetary policy to be essentially in tightening mode for the rest of the year.