Well any central bank has the onus
of regulating the money supply in the economy keeping a tab on the inflation.
But somehow I fail to understand that, how can one tame inflation by inflation?
By increasing rates the household budgets are inflated immediately. How can one
tame inflation by just increasing the interest rates?
Simply stated, when RBI decides to
increase rates, it tries to restrict the money supply in the economy, by making
it more expensive to borrow, and thereby anticipating that the inflation will
come down in prospect.
But food inflation does not exist
due to excessive money supply. People don’t necessarily take loans to buy food
articles, THINK! Food inflation occurs primarily due to
non-existent infrastructure in the farm-to-fork logistics chain. Food inflation
may also be caused due to illegal hoarding, as was seen recently in the case of
onions, or due to unruly weather. The RBI can’t fight food inflation by
snowballing rates. It has got only policy rates to play around with, and
nothing much as a firearm to control inflation.
