Column : RBI can’t fight inflation on its own
So, will the widening CAD and fiscal deficits undermine RBI’s efforts to control inflation? From a layman’s perspective, inflation means a rise in the price of essential commodities. In the parlance of economics, the price of any item rises when there is more demand relative to supply. Managing inflation, therefore, amounts to managing the demand for the product experiencing a rise in prices, or by increasing the supply of this item. In the case of managing a recession, exactly the opposite chain of events should take place. Before we go into how effective RBI has been in managing inflation, it is important to know what constitutes these demand and supply-side factors.
Among demand-side factors, consumption expenditure is important. In India, consumption expenditure contributes close to 65% of our GDP. The other components are private investment expenditure, government expenditure and trade. RBI can
