Figures are for pundits, feelings are for people.

One Pronab Sen has written a scholarly article on the causes of rising prices in India and how the Reserve Bank finds it difficult to control inflation through monetary policy, which means interest rate. The RBI controls the amount of cash in the country. All cash is held in 3 forms - in bank deposits, by people in the form of currency and in black money. Cash moves into the system when people withdraw money from banks to pay for higher food prices, due to direct government handouts through various social schemes and generation of black money. Price of food rose from 2009 to 2014 because the Congress increased the Minimum Support Price paid to farmers and did not release enough grains from stores. This was a deliberate policy to increase income for farmers. Thus even during drought years farmers had excess income and the NREGA program increased cash in the system, increasing prices. Then there are artificial shortages of food, especially onions, created by traders to extract illicit gains. In 2014 the MSP was raised by 3.8%, the government released 6.5 million tonnes of grain and spending on the NREGA scheme dropped by Rs 12,000, probably due to strict control of corruption, so the rate of inflation fell sharply. So the RBI had no role in controlling inflation. Splendid. We understand all that, but what does it mean? Does it mean that the RBI should do nothing if inflation rises, as it did to nearly 15% under the Congress in April 2009, but merely standby as a spectator? If we compare inflation with interest rate we see that every time interest rate was lowered inflation spiked and came down when the rate was raised. It was lowered to 4.75% in April 2009, just before general elections in May. The RBI has no control over government spending even if it strongly disagrees, as it does with waiver of loans given to farmers. Politicians like to shower taxpayer money on the people to win elections because it does not cost them a penny. To finance its spending the government borrows money from the market by selling bonds through the RBI. Even if a high interest rate did not help in controlling inflation the RBI can signal its alarm at irresponsible government spending by raising rate. Not just in India. Markets went up when it was revealed that the US created far fewer jobs last month than predicted. That is because it prevented the Federal Reserve from raising rates. The US, Europe and Japan want to raise inflation rate to 2% to make people spend more because people postpone purchases if prices are dropping. Indians do not think like western people because we do not have any social safety net for the very high taxes we pay so we tend to save as much as we can. High inflation means we save less, which means less money for investments and a low interest rate encourages people to buy gold. The only way to generate trust is to provide positive real interest rates. Only the RBI can do that.