RBI is, of course, right when it talks of incomplete transmission of inflationary impulses (from a hike in diesel prices, as and when that happens, for instance) or of supply constraints which can just as quickly give a fillip to inflation. Food inflation is a good example. With food inflation rising 9.5% in the January to June period as compared to the overall inflation of 3.5% in this period, it’s obvious the problem is more of a supply-side one than a demand one. In the case of fruits and vegetables, the January to June hike is a whopping 32.5%. A point reiterated when you see the rising difference between food-WPI and food-CPI to well over 100% now—with the number rising the most over the last few years, it is obvious retail-level reforms are the solution, and not anything RBI can possibly do.
In which case, it’s high time RBI and the finance ministry had a candid discussion instead of talking at each other through the media. If RBI isn’t going to cut rates in a meaningful manner till the government does its bit on easing supply constraints and on cutting expenditure, and the government isn’t going to do anything to ease supply constraints in a hurry, this seems to be the surest recipe for stagflation even if, as some argue, we’re not in stagflation at the moment.