Column Food for thought from pricey Asia

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The policy response to the latest inflation numbers in India has been predictable. RBI has increased the repo rate and the cash reserve ratio (CRR) like it has done quite a few times in the recent past. But will these be enough for taming inflation that is at a 13-year high?

The RBI’s moves draw attention to the ongoing debate on appropriate policy responses for controlling prices. The current bout of inflation is essentially of the ‘cost push’ variety. High energy and food prices have been instrumental in fuelling inflation all over the world. Is monetary policy the right response to curbing such inflation? Hikes in lending rates aim to sober prices by reducing demand. The worry is whether rate hikes will choke off the entire demand stimulus in the pipeline without making much impact on prices, which are going up due to entirely different reasons.

Major Asian economies have come up with a variety of policy responses for tackling the unusually high price levels. Institutional measures taken by some economies have been similar to those in India. Indonesia has raised policy interest rates, along with Philippines and Vietnam. Taiwan has also imparted a marginal upward push to interest rates. China—probably the most closely watched economy in the region—has been focusing on reducing liquidity without tinkering with rates.

Elsewhere in the region, central banks have been using currency appreciations, rather than interest rates, for battling inflation. Singapore is a leading example, followed by Malaysia. Currencies have also hardened in China and Taiwan. Harder currencies have helped these countries to absorb more cheap imports, which, in turn, have helped in keeping costs of production low.