As year 2008 started, the fairy tale of global economy came to an end. Suddenly, inflation has become a worldwide problem. The soaring oil and food prices that were once perceived as a mere blip in the growth cycle have suddenly become the spoilsport of the central banks, challenging their wits to keep them under check. This has obviously made the central banks nervous, for inflation expectations, once entrenched deeply, becomes difficult to be eliminated. This is reflected in Ben Bernanke's recent attempt to resurrect the dollar: "We are attentive to the implications of changes in the value of dollar for inflation and inflation expectations.

" The anxiety of central banks to tame inflation is so high that no sooner did Bernanke talk up dollar than Trichet, the Chairman of European Central Bank, gave a strong hint about the likely rise in their interest rates. This simply pushed euro higher, defeating Bernanke's efforts at giving a gentle push to dollar, besides causing turmoil in bond markets.

Amidst this pandemonium in global markets, India took some bold steps—both on fiscal and monetary fronts. First, the government, realizing that "there are limits to which we can keep consumer prices unaffected by rising import prices", has hiked the retail prices of petrol and diesel by about 10%—Rs 5 per liter of petrol and Rs 3 on diesel—and cooking gas by 30%, besides scrapping a 5% import tariff on crude oil—all to reduce not only the under- recoveries of oil-trading companies, but also the demand on the Center for additional oil-bonds that merely defer government's financial liability for OMCs to a future date.

On the monetary front, the Reserve Bank of India, for the first time in more than a year, raised its repo rate by 25 basis points to 8%—a five-year high—and perhaps all set to raise it by another 25 basis points soon. The move, though received by industry with a shudder, has become essential for more than one reason: one, it has to fall in line with global central banks, else there is the danger of rupee, which has already depreciated by 8% against dollar, depreciating further, including against other currencies which incidentally, means costlier imports; two, the widening current account deficit is posing a bigger challenge, particularly, in the context of falling foreign portfolio inflows into a none-too-happy stock market; and three, to anchor the inflationary expectations at acceptable level, it cannot afford to let real interest rates turn negative.

Analyst Magazine, Soaring Inflation, Global Economy, Financial Liability, Reserve Bank of India, Global Central Banks, Oil Consumption, global markets, Democratic Theorists, National Rural Employment Guarantee Scheme, NREGS, Fiscal Profligacy, Inflation Rate.