..........The second flaw in RBI’s approach towards inflation is the conviction that repo rate is an effective tool to contain inflation. Does repo rate always help in containing inflation? Is inflation a purely demand-push factor? Can it be controlled without managing supply side constraints? How can repo rate be effective if international crude prices go up? Also, with ever-increasing wages in rural areas supported by government policy measures and in urban areas because of ongoing business activities, is it possible to arrest the rise of inflation? Can RBI control inflation, when the government decides to give semi-annual dearness allowance hike of 10% to its more than 50-lakh employees, thereby adding substantially to purchasing power?...........
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