‘Monetary policy has a definite impact on inflation’

The monetary authorities need to have a clear hierarchy of objectives, including price stability and growth, among others, Chairman of Economic Advisory Council to the Prime Minister C Rangarajan said.

Delivering P R Brahmananda Memorial Lecture on ‘Dynamics of Inflation’ at the 95 Annual Conference of the Indian Economic Association here on Friday, he said the Indian experience in the last three years is a clear reminder of the primacy of price stability as an objective of monetary policy.

Paying rich tributes to P.R. Brahmananda, one of the foremost monetary economists, Dr. Rangarajan said that monetary policy has a definite impact on inflation even if it was triggered by supply side shocks. The failing agriculture and increase in cost of agriculture inputs and hike in the minimum support price has contributed to the increase in price of foodgrain, which has contributed significantly to the CPI and to a small extent the WPI.

Recalling Chakravarthy committee recommendations on an acceptable rate of inflation of four per cent, he said that the monetary authorities have acted on the assumption that the comfortable level of inflation is in the region of five per cent. “It would be inappropriate for Indian authorities to raise the acceptable level of inflation. Of course, inflation currently runs way above any acceptable level of inflation and it may take more than a year to bring it down to six per cent,” he said.

Citing our historical record to dismiss the contention that high growth warrants higher inflation, he said that the average inflation rate was 5.2 per cent during the three years that Indian economy grew at more than nine per cent.