Inflation in terms of Wholesale Price Index (WPI) in March,2011 was 9.7 %. RBI has taken an anti-inflammatory stance with the weapon of increasing interest rate to decrease the demand. Bank is adopting this only weapon from last one year and has hiked interest rate on lending FIFTEEN times in TEN months. Rise in interest rate is 25 basis points from May,2010.
Commonly argued reasons for inflation is food and commodity price rise, large fiscal deficit, rising demand of consumer apps. Central bank has no control over any of these roots. They can only try to force down the demand or expenditure on every front. This decision is also risky until they communicate to the people about the decision to reign over the inflation during shorter period of time. Here, excessive use of this policy may reduce the investment and growth of retail industry.
Taylor rule of monetary policy tells that every percentage increase in inflation, output, central bank should also increase the interest rate more than one basis point till the situation gets under control.