Inflation has become the buzzword in recent times in India and has attained the same status as a political weapon in the hands of opposition parties as that of corruption to beat up the coalition in power. Relentless media coverage about inflation as a public enemy has only added to the confusion about the phenomenon being described, the causes attributed for its existence and the effectiveness of policy actions being taken to counter it.
It has also been pointed out that the lack of clarity in the Reserve Bank of India (RBI) on the monetary policy framework—which enunciates the goals, strategies and operational tactics for this framework—coupled with large fiscal deficits have contributed to the prevalence of high and persistent inflation in India in recent years. Before blaming RBI, in particular, for failing to control inflation, however, it is important to examine a few conceptual issues involved from first principles. Read More