RBI and inflation

Undoubtedly it is the job of the government to tame inflation with clear policies boosting investment and containing fiscal deficit. The policy has to remove supply bottlenecks which fuel inflation. RBI’s monetary policy for the first quarter proclaims this truth loud and clear. Too much importance need not be attached to its higher-than-expected hike in the repo rate at which it lends to banks. But its policy has two reassuring features. The baseline growth in GDP has been retained at 8% as was done in its policy statement on May, 3. The RBI does not expect that the 50 basis points hike in the repo rate will hit the growth rate. Besides, it seems firmer in its resolve to curb inflation. Of course, this time also it has raised inflation projection for March 2012 to 7%, up from 6% as stated on May 3. It has recognised that its options are limited when the government refuses to play along with it. Inflation has now become a dominant macroeconomic threat. The government is seemingly lethargic about controlling fiscal deficit. The RBI has taken upon itself the responsibility of filling in for it. But the result is that the Central Bank has to take the blame for the government’s failure as in such a situation the former cannot produce positive results. There are structural obstacles. The monetary transmission mechanism or signalling system is not as good as it ought to be. Fiscal policy has to back up monetary policy. It is only then that there can be sustained growth and price stability. If the two policies are on divergent trajectories, results can hardly be satisfactory. The RBI is on the job. The government has to gear itself to address the problem in the right way.