Monetary policy transparency in India is very poor. It's only today - 12th April - that we find out the truth about what the monetary policy was in the month of February. We find that RBI purchased a HUGE $11.9 billion on the currency market - roughly Rs.52,000 crore. That's what I call pouring fuel into the inflationary fire. The implementation of the pegged exchange rate in February, with very little currency flexibility, came at the cost of an inflationary monetary policy. A few weeks ago, when I had written a piece titled `What RBI wants', there was an element of reconstruction of what was going on from fragmentary data. Now the data is out and we know just how bad it was.
Monetary policy regimes break down when the political costs of upholding the regime become unacceptable. In India's case, the INR appreciated from 44.2 to 42.8. Did the people who care more than RBI about inflation pick up the phone? How will things play out from here? In a non-transparent monetary policy regime, one does not know what is going on, or why. Monetary policy is one more stochastic process that economic agents have to cope with.