Monetary Policy Must Adapt to New Economic Realities

The traditional view of monetary policy is that increasing interest rates can control inflation by slowing down demand and thus reducing prices. However, this may not be effective in today's economy, where inflation is driven by supply chain disruptions and global events rather than excess demand.

According to Milton Friedman, inflation is always a monetary phenomenon, but the current situation is different from what it was in the past. Crude oil prices are rising due to global factors such as war and supply chain issues, while metal prices have increased due to higher demand from China.

In India, food price increases are mainly due to supply issues rather than excess demand. A higher repo rate may not be enough to control these prices, especially in cases where production is affected by weather conditions or other external factors.