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Inflation war in India

Tags: MDR
16 May 3:17am
Posted by fingad
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Inflation war in India - by Drdutta

Even if they had planned it, India’s premier policy making duo could not have synchronized it better. On April 29, Finance Minister P Chidambaram announced a slew of measures aimed at taming inflation. Among other things, he imposed an export duty on some kinds of steel products, did away with import duties on it, and also on some inputs like zinc and metallurgical coal.

At the same time, Reserve Bank of India Governor Y Venugopal Reddy, was announcing a 25 basis point hike in the Cash Reserve Ratio (CRR) in order to suck out excess liquidity from the system. (Most recently, a fortnight ago, the RBI had hiked CRR by 50 basis points.) In his annual policy statement, Reddy also placed a lot of emphasis on the target to mow down inflation, which was at an uncomfortable 7.4%, to 5.5 per cent in 2008-09.

The two separate moves sent out one strong message: it is now all out war on inflation.

The posturing aside, two questions remain. Is this enough to curb inflation? And if not, how much more can be done without tripping India’s growth story?

Inflation is a global phenomenon. Persistent commodity price increases have made monetary policy management unusually difficult across emerging markets. The triumvirate problem of rising food prices and fuel prices, and global financial instability, is bothering central bankers worldwide. Experts wonder how can RBI tackle this global menace merely by tightening domestic liquidity, especially since it seems reluctant to allow too much market-led rupee appreciation, which could help neutralise imported inflation.

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