The RBI credit policy continued with its anti-inflationary stance, raising interest rates, and indicated that controlling inflation would be its priority. For a central bank to be able to prevent price shocks from becoming persistent inflation, its policy strategy has to go beyond episodic rate hikes to a full-blown strategy of commitment, communication and consistency. While most people expected the rate hike, considering the increase in inflation as seen in the most recent data, others, such as industry lobbies, objected to the rate hike. It is argued that when inflation is being caused by factors that the central bank has no control over, such as food prices, global commodity price shocks or a large fiscal deficit, there is no role for monetary policy. It is true that the central bank cannot control an increase in onion prices if the harvest fails, and shocks to inflation will continue to be caused by such difficulties. The only thing monetary policy can do in this situation is to control the medium- or long-run inflation rate. It can ensure that owing to a credible commitment to a low inflation rate in the medium term, the rise in inflation owing to an episodic food price shock is seen by the public as a one-time temporary increase in inflation. That way it will not feed into inflationary expectations, into wage bargains and cost of production, and hence become generalised.
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