Global inflation no excuse for lax policy, MPC now accepts

The Governor of the Reserve Bank of India (RBI) announced an increase of the repo rate by 50bps following the Monetary Policy Committee (MPC) meeting on 5th August. 

This did not raise much hue and cry; the markets closed flat unsurprisingly. 

The quantum of increase in the rate was within the expected range, and finally, it seems that the RBI is doing what it is expected to do: fight inflation by increasing the policy rate.

Another argument that was being pushed forward earlier is that we are doing better than other countries, particularly the US. This is really facetious.

There is no doubt that inflation right now is a global phenomenon, and that several global factors are at play.

It is also true, that, for a change, India's inflation rate is lower than that in the US. However, that does not mean monetary policy in India can be lax.

Using the US as a reference in this case is wrong. It has a unique position in the world where its currency is seen as a safe asset.

This manifests in the fact that even though the US is experiencing one of the highest inflation rates among developed countries, the US dollar is appreciating against a broad range of currencies.

Moreover, there is an asymmetry in how monetary policy of US impacts India, and hence monetary policy in India needs to take that into account.

This is true not only for India, but for a large number of countries, both developed and emerging.