When in doubt, the Monetary Policy Committee’s motto should be: Do no harm

economictimes.indiatimes.com:

CPI rose to a three-month high in June. And, going by the sharp run-up in vegetable prices since it is likely to cross the 6% danger mark in July. Meanwhile, WPI contracted to an eight-year low.

Given these conflicting signals and the outlook turning increasingly uncertain, how should RBI's MPC react when it meets over the next three days, starting tomorrow? Should it regard June's higher CPI inflation number as 'transient' or 'structural'? Remember, El Nino, the freak weather disturbance that causes incessant rains and floods in some areas and droughts in others, is likely to ensure food prices remain elevated for a while. Remember, most central banks are yet to declare victory over inflation. Most importantly, remember it was not long ago that RBI (and the redoubtable Fed) assumed inflation was transient.

When it was anything but! Add to that burgeoning asset price inflation, and it's abundantly clear MPC has a serious problem. Should it mark time and maintain the status quo as at its last meeting in June? Or should it take a cue from other central banks, most of whom are continuing their tightening cycle? The US Fed raised rates for the 11th time since March 2022 (to the highest in 22 years) in July 2023, despite inflation falling to a 27-month low of 3%. The Bank of England was not far behind; it hiked rates for the 14th time by 25 basis points.

And they are not the only ones. Why? Could it be that central banks for all their show of 'omnipotence' are not sure they understand inflation? And would rather play safe than deal with the consequences of ignoring their old bete noire. YV Reddy, former RBI governor, famously spoke of how economists often refer to 'monetary transmission' channels as a black box — implying we