Why is infaltion sticky in India?

 

 

 

 

Monetary policy and fiscal policy are in contradiction. Monetary policy is tight whereas fiscal policy is loose which has resulted in a flat yield curve. Inflation remains high as the output gap is still not negative - demand has gone down but investment has dropped more than demand and thus there is no situation of an excess capacity in the system. Thus the prices are sticky. In sectors, such as auto, where there is excess capacity, prices have come down. Solution - Prop up demand, slashing interest rates will not solve the problem as capex cycle is very low and investment is not forthcoming.