Taming Inflation

Your editorial comment “Anchoring Inflation Expectations” (7 May 2011) on the annual monetary policy statement of 2011-12 is cogent. The Reserve Bank of India (RBI) has adopted a pragmatic approach while framing monetary policy, but, despite the measures undertaken, inflation has been ruling at a higher level.

Inflation, which is ruling at a consistently high rate due to supply-side imbalances, will have a serious impact on the economy unless it is tamed. Demand-side pressures are also mounting. So inflation is likely to persist in the long run. Consequently, the RBI will tighten monetary policy; this is quite natural. The high inflation rate will, however, reduce the GDP growth rate expectations. Nevertheless, one silver lining is the growth of lending by the banking sector, which has remained consistent and strong. But monetary policy alone cannot reduce the inflation rate. Supply management has to be strengthened simultaneously to reach the target.