Inflation beyond control of monetary policy

In an open economy, RBI can do little do bring inflation under check. Its rate hikes are, in fact, counter-productive.

The RBI has been on an ‘interest hike’ spree for quite some time now, but inflation has not come down. The misconception that a hike in interest rate can contain inflation is based on monetarism, propagated by Milton Friedman. The fact is that the Government can do little to check inflation in an open economy. As a corollary, if commodity prices were to fall in the event of a double-dip recession, the government can hardly claim credit for bringing prices under control. It is, of course, another matter whether commodity prices are headed southward at all.

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