Can monetary policy curb inflation

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)

By D.H.Pai Panandiker

Inflation turned positive from the beginning of October and presently is at 1.7 per cent. It is quite likely, even if prices remain stable in the next four months, that it will touch 7 per cent before the end of March next year.

The RBI has been rightly concerned about the galloping inflation and the Governor would have perhaps liked to hike the interest rate when he announced the credit policy on October 27.

Although the Bank takes its own decisions, there was pressure both from the Finance Ministry and the PMO to stay put since the signs of economic recovery were still feeble.

The Governor therefore preferred to choose the harmless option of raising the SLR.

Inflation hurts and it hurts the underprivileged more. Although it is RBI’s job to pull it down, the kind of inflation that we are having today is different and it has to be addressed more by the Government than the RBI.

Usually, inflations are either due to excess demand or a rise in costs. The present inflation is simply due to a sharp fall in agricultural production caused by the failure of monsoons. But there is more to it than that.

The inflation that we are having today is the kind of inflation that India experienced in the sixties. It follows a pattern. Monsoon fails and prices of food products rise; Government raises procurement prices and the market kicks them up further; consumer prices shoot up and, with consumer prices, wages; with rise in wages prices of manufactures also rise. Inflation, which starts with agriculture, spreads to all sectors.