...........So, predicting what a central banker would do when he looks at the heat-map is easy. Policy rates will be raised to tame prices. And if inflation is accompanied by high growth, the decision is a no-brainer. But that’s not the case in India at the moment. GDP growth has slipped sharply to 5% in the last fiscal and prospects for the current one are worse. CRISIL expects growth to slow further to 4%. This creates a dilemma: should RBI focus on growth or high inflation? This is hotly debated every single time before the announcement of the monetary policy. We argue that a sluggish economy does not mean RBI should become tolerant of high and rising inflation. Therefore, the decision to raise interest rates on October 29—which implies that risks from high inflation outweigh risks from low growth—was appropriate...........
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