There is an argument to be made for paying equal attention to variables besides inflation, and considering responses outside of policy interest rates.In the Indian context, estimating CPI and measuring the impact of policy interest rates on CPI can be hazardous. Markets now expect CPI for the next month to dip below 2%, contrary to predictions at the beginning of the year.Likewise, the impact of policy rate on CPI bears review. It bears noting that higher interest rate also increases input cost for borrowing producers. If we have high twin deficits, higher interest rates could attract foreign inflows, stem currency outflows, penalise twin deficits, and stabilise markets. Public discourse would likewise do well to focus on financial stability as a whole, while considering a variety of tools, outside of the RBI and policy rates.

Source: Economic Times June 13, 2017 20:26 UTC