With inflation-generated discontent among public giving sleepless nights to those in power and policy makers, the question is whether the authorities would resort to quick-fix measures to stem inflation, sacrificing long-term prospects for short-term expediency.

In a much-anticipated move, the Reserve Bank of India (RBI) stepped in, on July 2, 2010, to rein in the double-digit inflation that has come to haunt the policy makers as well as the common man in recent months. Based on an assessment of the prevailing macroeconomic situation, the RBI announced a couple of monetary policy measures "as a part of the calibrated exit from the expansionary monetary policy." The measures, which came into effect immediately, included: an increase in the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points, from 5.25% to 5.50%, and an increase in the reverse repo rate under the LAF by 25 basis points, from 3.75% to 4.0%. Coming as it did after the earlier increase in the repo and reverse repo rates by 25 basis points in April this year, and ahead of the policy review of the bank on July 27, the RBI's latest decision to increase the short-term rates at which it lends (repo) and borrows (reverse repo) money from commercial banks was welcomed by the Union Finance Minister Pranab Mukherjee, who termed it "desirable, given that core inflation has risen."

What triggered the RBI's move was the disquieting rise in the Wholesale Price Index (WPI)-based inflation, which touched doubt digits, 10.2%, in May 2010. In fact, available figures indicate that the rate of price rise has been 11% since February. Though food inflation eased to 12.6% in end June, from 17.9% in end March, the RBI deemed it fit to intervene before the scheduled July policy review. Giving its rationale for the midcourse monetary measures, the RBI said, "The developments on the inflation front, however, raise several concerns…. Food price inflation and consumer price inflation remain at elevated levels. There has been some moderation in food price inflation, but the price index of food articles continues to increase. More importantly, the prices of non-food manufactured goods and fuel items have accelerated in recent months." The apex bank expects these monetary measures to "contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process."

The Analyst Magazine, Inflation Management, Reserve Bank of India, RBI, Monetary Policy, Recovery Process, Global Financial Crisis, Forex Market Interventions, Federal Open Market Committee, Global Commodity Prices, Debt Instruments, Indian Equities, Open Market Operations, Market Stabilization Scheme, Gross Domestic Product.