View: An inflation tide is coming. Here’s how India can sail through it

View: An inflation tide is coming. Here’s how India can sail through it

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The increase in commodity prices have the potential to stoke inflation in general, given the excess of liquidity sloshing around in the system, thanks to central bank eagerness to support any sign of growth,

Synopsis

Just as monetary policy lets rising crude prices filter through the system, instead of trying to stamp them out, monetary policy should allow rising prices of steel, copper, coal, iron ore, etc, filter through the production process and produce appropriate responses of raising output, increasing the production of close substitutes, increasing efficiency. Any temptation to raise policy rates and choke off the price rise of these raw materials should be resisted.

The possibility of a spike in inflation in the near term is high, driven by a spurt in global commodity prices. Monetary policy should look through it, rather than raise rates to squeeze it out of the system. Fiscal policy should continue to be expansionary, to increase output to match increase in demand. The government should let the rupee harden and slash import duties, to cushion the economy from the impact of rising inflation.The Economist

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ET Bureau

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