Inflation is back as a talking point in the public arena, some would say belatedly, for wholesale price inflation has been in the double digits for over 12 months. India’s official measure of inflation, the rate of change of the consumer price index, has now breached the Reserve Bank of India (RBI)’s upper target of 6% for three months continuously. At the conclusion of the April meeting, the Monetary Policy Committee had already warned that the focus will henceforth be on inflation. Yesterday it raised the repo rate somewhat sooner than was expected by the market.
It may appear contradictory to ask whether the RBI’s stated policy of ‘inflation targeting’, implemented through changes in the interest rate, can control inflation, but we show here why that would be justified.
