With the inflation at 11% , both the ministry and the bad Rbi policy (which has been seen to clearly be in the governments good books instead of looking at hard facts) are to blame. Worse the RBI unlike the British BOE is very non transparent, and influenced by politics.
Ila Patnaik writes in her post Engineering Inflation
How do exchange rate changes get passed on to consumers? When the rupee appreciates, and rupee price of international commodities falls, sellers may first not pass on the benefit to the buyer. Instead, their profit margins would go up, say, as their raw materials might have become cheaper. However, if there is competition in the market, sooner or later, prices in the domestic market will come down.
On the other hand, when the rupee depreciates and say, raw materials get expensive then companies take a hit, their profit margins go down. If companies keep selling at the earlier prices, they will go out of business. This leads to an increase in domestic prices. The structure of the market will determine the speed and extent of the passthrough. The graph suggests that the effect works both ways, when the rupee strengthens and when it weakens.
It is not expected that there should be a one to one relationship between the exchange rate and prices. For example, even with the rupee appreciating, if there was an increase in global commodity prices, inflation is expected to move up. The recent episode of inflation has been more difficult because the effect of the increase in global commodity prices was exacerbated by the RBI’s preference for a weak rupee. The sharp increase in liquidity that resulted from RBI intervention further strengthened the pressure on prices.
In her latest post on who is paying for govt policy- What price people?
In the last two years, while there was an increase in liquidity in the system due to dollar purchases of RBI, this liquidity was sucked out by selling Monetary Stabilisation Scheme (MSS) bonds. Here, the costs of running the pegged exchange rate regime were placed upon the ministry of finance which has to pay interest on the MSS bonds. However, after October 2007, RBI stopped selling MSS bonds.
There is no free lunch. Someone has to pay for the dollar peg. As the finance minister, P. Chidambaram, correctly pointed out in his budget speech, the interest payment on MSS bonds in the budget constitutes a subsidy to exporters that is borne by the exchequer. By stopping MSS issuance and switching to CRR hikes, the cost of this subsidy was shifted from the government to banks and their users.
With a hike in CRR, banks have to hold a larger proportion of their deposits as cash with RBI. This means the interest earned by them on deposits goes down. The reduction in returns is borne either by banks or their customers. Either depositors get less interest income or borrowers pay higher interest rates. This cost, borne by banks and their customers, is the price of subsidising exporters.
RBI is non-transparent about its actions and about the rationale behind these actions. When MSS issuance was stopped, no announcement was made, nor was a rationale offered. With a lag of months, external observers are left trying to piece together the events from incomplete data. Today, there is no institutional framework in India that enables Parliament to question RBI and its policies. No one is going to answer the question as to who is responsible for the macroeconomic mismanagement that has led to slower growth and higher inflation.