The Reserve Bank of India (RBI) has done well to increase its key policy rates by another 25 basis points. The inflation fire shows no sign of abating, so monetary policy needs to become tighter.
The central bank has also clearly indicated that some growth will have to be sacrificed in the short run if inflation is to be tamed. The government needs to support RBI in this tough quest, despite the fact that less robust growth will hurt its tax collections. Higher interest rates will also push up the cost of servicing our public debt. Manmohan Singh had backed C. Rangarajan in the mid-1990s while P. Chidambaram had fought with Y.V. Reddy in 2007. We hope the current finance minister lets D. Subbarao do his job.
The government has a more positive role to play as well. First, fiscal policy needs to be tightened as part of a coordinated policy response. Second, the government can help by giving a much-needed reforms stimulus.