Is RBI responsible alone to control inflation?
At a time when inflation in India was reigning high, the Reserve Bank Of India (RBI) responded by resorting to 13 successive rate hikes since March 2010.
This did not do much in terms of bringing inflation down drastically but instead slowed down the growth of the Indian economy. Weakness in the global economy also piled on the pressure.
Now with the central bank worried about how growth will pan out, there are hopes that more rate cuts will be on the cards. But will rate cuts be enough?
In the battle against inflation, it is very clear as to who is doing its job of trying to bring it down. It is the RBI.
The government has not done much and the central bank has left no stone unturned in pointing this fact out.
The RBI governor Mr Subbarao has very emphatically stated that there is not much the central bank can do about inflation when the government is ruining the fiscal situation by overspending.
Thus, while inflation has been easing of late, this may prove to be temporary and leaves very little headroom for the RBI to go in for rate cuts.
Mr Subbarao maintains that upside risks to inflation persist from insufficient supply responses, exchange rate pass-through (caused by the rupee depreciating but imports staying high), suppressed inflation (subsidizing fuel prices at the retail level has played a role in keeping inflation down) and an expansionary fiscal stance (too much spending by the government).
What is more, each of these issues can be addressed only by the government.
So what does the government need to do?
To start with, it needs to take a long hard look at the subsidy structure and find ways of bringing this down.
Then, supply bottlenecks when it comes to distribution of food have to be done away with so that food inflation problems do not surface time and again.
The idea is that the government needs to spend less on consumption and more on investment.
But the real solution is to push through reforms and not be mired in indecision of the kind that we are witnessing now.
While these issues have been pointed out over and over again, the apathy of the government really makes one wonder whether any meaningful solution will be ultimately reached.
Not everything can be done by the RBI.