A worried man.

The Reserve Bank Governor, Raghuram Rajan must be relieved that the new Finance Minister sees the need to control inflation rather than indulge in silly tantrums like the previous incumbent in the ministry. In a way it is what the Americans call a ' no-brainer '. After all, the BJP is in government precisely because of public anger with uncontrolled retail inflation and with elections coming up in Maharashtra, Haryana and Delhi this year it will be stupid not to make a serious effort to control prices. Runaway inflation acts as a break on growth by reducing consumption which forces companies to cut production and postpone new investments, thus reducing employment. People stop saving because the interest paid by banks on term deposits is less than the rate of inflation so savings keep losing value. To control inflation the RBI increases interest rates which increases borrowing cost for industry and reduces investment. But the RBI cannot do it alone. One very big reason for the rise in prices was corruption. There is the everyday bribes that we have to pay whenever we need to access official services. This acts as a tax on transaction and is accounted for in the pricing. The bigger corruption was grabbing of land and resources, such as coal and iron mines. The result was a jump in commodity prices which was passed on to the consumer. Corruption is for politicians to control but Mr Rajan is worried about large flows of foreign currencies into India. Interest rates are close to zero in the US, UK, Europe and Japan so fund managers pour vast amounts into emerging markets in a bid to increase returns for investors. The Indian stock market is booming because Foreign Institutional Investors are buying. Influx of vast amounts of foreign exchange makes the rupee stronger which makes our exports more expensive and encourages imports by making them cheaper. Our industries lose out to cheap products from China. Hot money can flow out suddenly as happened last year when the rupee dropped to 68 to the dollar. Low interest rates abroad and a strong rupee encouraged our businesses to go on a borrowing spree and when the rupee suddenly lost value they were caught in a debt trap. The central bank can buy up dollars from the market to push down the rupee which is what China and Japan have been doing but that increases money supply and pushes up inflation. Inflation in China is below 2% while Japan has been fighting deflation but with CPI at over 8% there is a limit to how much dollars the RBI can buy. This is the dilemma which is making Mr Rajan angry. The good thing is that he has defined the problems and is trying to deal with them. We hope that politicians will support him. If the BJP wants to win again in 2019 it better.