As economic growth falls, the Reserve Bank of India (RBI) once again faces a decision whether to cut interest rates to spur growth. This would be an easy decision were it not for the fact that inflation has been consistently rising since the start of the year. This is a difficult decision because of the trade offs involved. Cut interest rates to boost growth at the risk that inflation balloons. Or leave interest rates the same and risk that growth continues to tumble. Our assumption with that line of thinking is that inflation is significantly affected by the RBI's interest rate decisions. However, if we look at the causes of inflation, we'd see that most of it is completely out of the RBI's control. And actually, the RBI's decisions will have little impact on inflation.
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