We can have one or the other, cannot have both.

"Is a tighter monetary policy on the cards?" ask Joshi and Deshpande. What they are asking is whether the Reserve Bank will keep interest rate high to control inflation. Inflation is a sustained rise in prices which hurts consumers and reduces the buying power of the currency, thereby hurting savers by reducing the value of the money they have saved. Prices may rise when demand is more than supply or when the input cost, that is the cost of raw materials and energy, rise. Most advanced economies target an inflation rate of 2% after New Zealand adopted it in 1989. What is more important to us is that the Federal Reserve in the US also targets a rate of 2%, although some economists have argued for a higher target of 4%, while the Reserve Bank of India has set a target of 4%, plus minus 2%, which means it can vary in a wide range of 2-6%. This means that the rupee is able buy less than the dollar every year. One dollar bought Rs 7.5 in 1966 but it has gradually increased to around Rs 65 today, briefly falling to around Rs 40 in 2007. So what? The problem is that most imports, especially oil and gold, are valued in dollars and a fall in the value of the rupee immediately causes a jump in prices. Politicians are sensitive to high prices because they hurt the poor and lose elections. But people use a wide variety of goods and services, so which prices to monitor? There is wholesale price inflation, which is cost before goods reach the consumer, there is consumer price index, which is the value of goods and services we buy, and there is core inflation, which is based on what we pay, minus food and fuel, which are very volatile. So how to keep prices under control? The RBI watches consumer prices, raising interest rate when prices rise and lowering it when they fall. In February, the RBI kept the interest rate at 6.25%, when everyone expected it to be lowered because CPI had fallen to 3.17%. Analysing the RBI's action Salunkhe and Patnaik feel that it was because core inflation remains sticky at 5%. Why? Because services, such as healthcare, education and housing are expensive and the demand for these cannot decrease, wrote Aparna Iyer. A high interest rate is supposed to reduce prices by increasing the cost of borrowing so that demand comes down. Does it work? Karthik Shashidhar argued that interest rate is useless in controlling inflation. High prices may lose elections, but economic growth is equally important. "Consumption spending now comprises 83% of total spending, up from 78% a decade ago." To stimulate growth the government wants to spend more on job creation. It wants low interest rate to be able borrow more. The danger is that if it increases spending prices will rise. Maybe the RBI is warning the government.