q u o t e

Thursday, November 3, 2011

inflation and RBI policy

that inflation is dirctly linked to interest rates seems to be a classic distortion. in that case western economies where the interest rate is very low should have seen significant inflation. in our own country when the rates were low a few years back no run away inflation was noticed. so the real reasons of inflation are yet to be identified. and  without proper diagnosis no treatment can be effective. rbi policy will most probably keep its reputation and remain a damp squib

there should be other means of controlling inflation like market intervention. for example if the govt supply say onion at half the market rate in sufficient quantum thru adequate number of outlets for a reasonably long period the market price has to come down. no doubt about it. yes govt may suffer a loss but that is a different issue . whether that loss is comparable to the gain elsehwere should be studied . my point is that repeating like a parrot the simplest theory available in the oldest of economic text books is a little jarring . especially when it comes with the approval of a great economist  like our dear prime minister