A hike in repo rate - the rate at which banks can borrow from the Reserve Bank of India - by yet another 20 bps taking it to 7.75%, a 50 bps hike in Cash Reserve Ratio - a cash deposit that banks have to maintain with the RBI at the prescribed percentage of their net demand and time-liabilities - taking it to 6.5% so as to suck out about Rs14,000 cr from the market, and a reduction in interest rate that the RBI pays to banks on deposits maintained with it under CRR are what constitutes the monetary prescription of the RBI. It is obivously meant for: one, constraining the growth of liquidity in the system; two, make credit dearer; and three, deflate credit-multiplier effect - all in the anxiety of arresting the rise in inflation that has already touched 6% plus.

The high growth rates coupled with rising inflation have of late become a global phenomenon, and hence many central banks have either sprung into action or on the verge of taking corrective policy decisions. The European Central Bank and The Bank of Japan have each raised their interest rates by 25 bps, while the People's Bank of China has raised its one year rates by 27 bps, along with a rise of 50 bps in reserve requirements. Driven by these global developments and its belief that in the long run, high inflation is inconsistent with high growth, the RBI has tightened its monetary policy to arrest the spiraling growth in money supply. This has, of course, raised many eyebrows: some critics have dubbed the tightening of the monetary policy measures by the RBI as a `growth killer', for, in their opinion, current inflation being more due to `supply-side' constraints rather than demand-driven, monetary measures are of little or no avail. Let us take a critical look at it.

First, inflation. It hurts common man. To be precise, it hurts badly those who do not have a steady source of income. It even hurts savers by adversely impacting their returns on investments. It hurts exporters by weakening their price competitiveness - particularly in the current scenario of buoyant foreign exchange inflows. And, once inflationary expectations rise and inflation gets entrenched, it becomes very difficult to wriggle out of it. Hence, high inflation is not acceptable politically. That aside, supply-side corrections do take time to respond to corrective measures.

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