Focus on CPI inflation

Exchange rate stabilisation will import high tradeables inflation into India

At the heart of the monetary policy is the choice between controlling inflation versus controlling the exchange rate. In previous decades, there was an argument that by stabilising the exchange rate, we stabilise domestic prices. Inflation targeting was nevertheless chosen, because of other aspects of the tradeoff, particularly for a continental economy like India. Now that world inflation has been destabilised, even if the USD/INR is unmoving, this only means that we will import global inflation into India. The tradeoffs have shifted in favour of less exchange rate management.

Inflation in India took off in the 1970s and has repeatedly flared