How was the tight monetary policy expected to control inflation, which was external?
Look at the global situation and then look at what was unique to the Indian situation. There was a period when interest rates were reduced all over the world. In retrospect, excess liquidity created imbalances. They ignored commodity prices on the ground that it was external shock and they got into problems. Now the wisdom across the world is that those who didn’t fall in the trap of low interest rates were right. In India, a commodity shock cannot be ignored for two reasons. One, the assumption of a commodity shock is that things will come back to normal but you don’t know when and whether [it will happen at all]. Our view was that we had to be cautious and we had to take some action, assuming it wouldn’t be a temporary shock, and we were right. Secondly, it certainly has an influence on prices and inflation. So, ignoring commodity prices was a mistake made by many other countries. Title: India and the Global Financial Crisis: Managing Money and Finance Author: Y.V. Reddy With a speci
