We are data dependent...

We are data dependent... If inflation goes up we have 25 basis points hike on the cards. According to (a moderate) Taylor-Rule perspective we need to increase key interest rates by 5 percentage point if we want inflation to come down near 5%. We have done 50 basis points so far and if inflation WPI is 7.5% we need to increase key interest rates by 200 basis points. The WPI-CPI dichotomy as index of inflation is only the first argument for price-stability… the second one being, we in INDIA have accepted 5% inflation as normal while developed countries have accepted complete price stability (zero inflation) as the objective of monetary-policy… complete price stability has become the new norm in developed countries but in our country prices are so high that a high interest rate to keep demand in check is the right policy for the time-being... If inflation goes too high we can not reject a 50 basis points hike then (probably) again a pause for more data. The data on unemployment should be the next reference point to decide for interest rate movements… Moreover Rajan has said at more than one place that he wants to reward savings a higher real-rate of return. He needs to send a strong signal to contain inflationary expectation and wage demand growth. And, to the government, too, to contain fiscal-deficit which has reached 94% in the first three quarters, and with a quarter still to go… Higher interest rates also affect bond yields and also on government bonds, and, higher interest rate will also deter government from borrowing…