We are what we are!!
RBI was widely expected to cut the repo rate yesterday but it refrained from it springing a surprise. Central bank should always use monetary policy as a weapon and it is most effective when weapon is wielded with a veil of secrecy and surprise.
But to some extent RBI's prognosis of inflation seems to have been influenced in general by food inflation and in particular by onion .The skyrocketing prices of onion caught the eyes of the Governor and his monetary policy team to unanimously decide against rate cut and push the pause button. Governor justified this decision by emphasising that the mandate to RBI given by Parliament is only to contain inflation.
There is a Taylor rule or principle in containing inflation by the Central bank. According to this rule Central bank tends to raise the nominal interest rate by more than 100 bps for every 100bps increase in inflation. So, in simple terms, Central bank will have to use a bigger weapon to tame the animal called inflation. However this can work effectively only in the short or short to medium term. There is a Golden Ratio that exist between the interest rate and the inflation rate and this ratio is delicate , flexible and brittle if not peppered with the element of surprise. If this is not deployed properly Milton Friedman and others cautioned us saying that inflation will tend to catch up with the interest rate which moves at higher proportion, when efficiencies and productivity in the economy are in low key.
Then what is effective in the long run? Keynes comes to our rescue by saying "in the long run we are all dead". Perhaps , that is why Economics is called "Dismal science"!! But Onions keep it lively!!
RBI was widely expected to cut the repo rate yesterday but it refrained from it springing a surprise. Central bank should always use monetary policy as a weapon and it is most effective when weapon is wielded with a veil of secrecy and surprise.
But to some extent RBI's prognosis of inflation seems to have been influenced in general by food inflation and in particular by onion .The skyrocketing prices of onion caught the eyes of the Governor and his monetary policy team to unanimously decide against rate cut and push the pause button. Governor justified this decision by emphasising that the mandate to RBI given by Parliament is only to contain inflation.
There is a Taylor rule or principle in containing inflation by the Central bank. According to this rule Central bank tends to raise the nominal interest rate by more than 100 bps for every 100bps increase in inflation. So, in simple terms, Central bank will have to use a bigger weapon to tame the animal called inflation. However this can work effectively only in the short or short to medium term. There is a Golden Ratio that exist between the interest rate and the inflation rate and this ratio is delicate , flexible and brittle if not peppered with the element of surprise. If this is not deployed properly Milton Friedman and others cautioned us saying that inflation will tend to catch up with the interest rate which moves at higher proportion, when efficiencies and productivity in the economy are in low key.
Then what is effective in the long run? Keynes comes to our rescue by saying "in the long run we are all dead". Perhaps , that is why Economics is called "Dismal science"!! But Onions keep it lively!!
Comments
Post a Comment