FE Edirorial: Price and stability

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: RBI has now made it amply clear that it is more worried about inflation than growth in the months ahead. As we have argued repeatedly in these columns, this is an unfortunate shift in the discussion on interest rates. Growth remains too fragile to even signal an imminent hike in rates, something RBI has already done, well in advance of most other G-20 central banks. But since RBI has insisted on shifting the debate to inflation, let us look at inflation more closely. There are plenty of problems with all the currently used indicators of inflation in India—WPI and four CPIs—and they certainly need to be revised if they are to be used as reliable guides to set monetary policy. Leaving aside those methodological issues, a few things are clear about inflation, as we are experiencing it now. There is definitely a problematic situation in food prices, which have risen sharply over the last few months. But the problem has its roots on the supply side—bad monsoon, among other factors, had led to shortages. And the government hasn’t been quick enough with allowing imports to make up for those shortages. And as the global economy revives, there may yet be more real and speculative pressure on food prices. Unfortunately, interest rates are not the best way to tackle this problem. By squeezing demand sufficiently, a hike may eventually force the prices of food down, but not without taking a toll on growth.