October 22, 2007
Abstract: Considering the domestic and international economic environment, what should the quarterly credit and monetary policy for India focus on? Domestic industrial growth does not suggest the need for a fiscal stimulus. Nor does the low inflation rate warrant a contraction in money supply. The advisable course of policy action would be to “hold”. Next, given that the US economy is slowing down and there would be a decline in exports to the US, an advisable action for monetary policy would be to “hack”, to stimulate domestic demand. Finally, if the higher oil prices (which are known to trigger rapid inflation) and the potential capital inflows (which would result in rupee appreciation), are to be controlled, then “hike” would be the appropriate action for monetary policy. Usually, when there are strong arguments for movements in opposite directions, the status quo is chosen.
Keywords: industrial growth; inflation; monetary policy; rupee appreciation
