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other products in the consumption
basket. The consumption basket of the
poor is disproportionately focused on
food which cannot be brought forward
because of its perishability. In a 2014
working paper, the IMF said with food
inflation remaining persistently high
for five years, monetary policy needs
to remain tight to control generalized
inflation. Given the elevated and
persistent inflation, the RBI may
need to raise rates to tackle inflation
durably, particularly if faced with a
persistent and sizable supply-side
food price shock putting pressure on
broad-based inflation. As inflation is the central bank has to compensate
with tighter policy to achieve the
inflation objective. The RBI has further
held the view that since food and fuel
account for more than 57 percent of
the CPI on which the direct influence
of monetary policy is limited, the
commitment to the nominal anchor
would need to be demonstrated by
timely monetary policy response to
risks from second round effects and
inflation expectations in response to
shocks to food and fuel.
Since 2014, the Government of
India took several steps to rein in
food inflation. The minimum support
mostly backward looking, monetary
policy has to maintain a tight stance
for a prolonged period of time.
The RBI was historically reluctant
to lock itself into an inflation-focused
framework is because of the dominance
of fiscal policy over monetary policy in
the Indian context.The possibility of
fiscal dominance, however, only means
that if the government overspends, prices for key agricultural commodities
were increased. Government released
additional food grains from the Central
Pool into the market. Government
further notified that buffers norms of
these foodgrains to levels significantly
below prevailing actual stocks. These
measures have helped lower cereal
(rice and wheat) inflation.
In their 2017 Article IV
consultations, the IMF has said that
India’sCPI inflation is expected to
remain contained in the near term, but
inflationary pressures are set to rise in
the second half of 2017.With temporary
demand disruptions and increased
monsoon-driven food supplies, CPI
inflation is expected at about 4 ¾
percent by early 2017, in line with
the RBI inflation target of 5 percent
by March 2017. However, inflationary
pressures are likely to reappear in the
second half of 2017, in part reflecting
government pay reviews and the
waning effects of the oil price collapse.
Upside risks to inflation stem from
supply-side factors, such as volatility
of agricultural prices, including due to
possible smaller harvests as a result
of cash shortages inhibiting purchases
of agricultural inputs. To conclude it
can be said that inflation and growth
are two sides of the same coin. The
RBI has sets policy rates as low as
it can, consistent with meeting the
inflation objectives. The transition
to a low inflation economy requires
sustained fiscal policy support. India is
on the path to building the institutions
necessary to secure a low inflation
future. The Government has taken
the momentous step of amending the
RBI Act to provide for a statutory
and institutionalized monetary policy
committee for maintaining price
stability while keeping in mind the
objective of growth. The MPC has
been entrusted with the task of fixing
the benchmark policy rate required to
contain inflation within the specified
target level. For the period, 2016-2021,
Government has notified the inflation
target as 4 percent with an upper
tolerance level of 6 percent and lower
tolerance level of 2 percent.

The Author is an IAS officer of 1989 batch and has served as Private Secretary to Finance Minister, Advisor to Executive Director
(India) International Monetary Fund, Washington DC and as Planning and Finance Secretary Government of Rajasthan.
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