The recent inflation in India has gone much beyond the comfort level of 5%. Since inflation hurts the poor the most, the government is taking strong inflation-control measures. The most important question now is whether monetary policy will come up with its own measures to support the fight against inflation? However, in view of the causes of inflation as well as the current slowdown in the manufacturing sector, a hike in the rates may not be advisable. The article examines the current scenario of inflation and issues related to its control.

On the week ending March 22, the Wholesale Price Index (WPI) index in India went up to 39 month high of 7%. Since the past few months, the apprehension of inflation shadowed an otherwise healthy growth rate. Table 1 shows the inflation rates since October 2007. The last time the inflation had reached the 7% mark was in December 2004. Over the past six months, the lowest has been 2.97, that was in October 2007. Observing the increasing trend in inflation, monetary authorities are maintaining a hawkish stance on interest rates. In the last monetary policy review, in January, the policy rates were untouched although there was a global softening of interest rates, especially in the US. Despite that, the current inflation rates caught even the RBI governor by surprise and speculation is rife that RBI may tighten monetary policy soon by increasing the Cash Reserve Ratio (CRR).

Inflation, which is defined as a sustained rise in prices of most commodities, can be caused by both demand side and supply side factors. According to the Keynesian theory, if the aggregate demand in the economy increases, due to any of its components such as consumption, investment or even exports, prices will go up. This is the classic case of "too much money chasing too few goods." Economists call it as `demand pull inflation'. However, in the Indian context, supply side factors are perhaps more critical. Most economists are blaming global hike in commodity prices as the major cause of inflation in India. An increase in prices has been due to metals, oil and food grains. During the week ending March 22, minerals went up by 38.2%, vegetables by 4.9% while edible oils gained 1.6% in India. The commodities mentioned above occupy a weight of 22% in the WPI. According to government data, index for minerals group jumped to 38.2% which was pulled up by 46% increase in iron ore and 57% increase in steel ingot.

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