A popular phrase that economists often borrow to describe inflation is from Milton Friedman: Substantial inflation is always and everywhere a monetary phenomenon.

Prices have surged in the past few months in a manner a generation hasn’t witnessed, prompting central bankers worldwide to tighten monetary policy. Of course, India is among the few countries that have seen far worse price pressures; hence, Mint Road is keeping calm.

Crude oil, aluminium, steel, copper, fertilisers, natural gas – prices of all commodities have soared and are beginning to seep through to consumer prices.

The earliest assessment was that supply disruptions because of Covid caused the price rise. Then it shifted to a shortage of chips, then the capacity constraints due to ESG that put a lid on expansion. Now, it’s the Russian invasion of Ukraine.

What’s conspicuous is the central bankers’ silence on how much of their note printing is contributing to the price rise. India targets inflation of 4%, with a latitude half that of either side. But it saw prices rising 6.07%, above the upper tolerance threshold of 6%.

The central bank Monetary Policy Committee (MPC) is meeting this week against this backdrop.

The MPC, led by Governor Shaktikanta Das and deputy governor Michael Patra, has argued that this time, the setting is different for India.

“We have continued with our accommodative stance based on our own domestic growth-inflation dynamics, amidst current divergence in policy actions of central banks across the world,” Das said last month.

The West had near-zero rates, hence has to catch up, while India need not. Patra listed that the room for reduction in central fuel taxes, record food production, supply-side interventions, low pass through and high foreign exchange reserves could help cushion global inflationary impact.

India’s CPI, which gives nearly 40% weightage to food, maybe under check due to record foodgrains production, but there could be second-order effects.

“We expect the impact of supply-side disruptions on the agriculture sector to stem from higher inflation pressures, mainly due to the second-round impact of higher international food prices and input costs, and an increase in fiscal pressures as the government’s fertiliser and food subsidy bill could see an increase,” said Upasana Chachra, an economist at Morgan Stanley.

Besides inflation targeting, the full-service central bank also looks at financial stability as its key deliverable.

Last year, Governor Das articulated his worries about the stock market levels and retail participation. It is just accelerating. Indian equities, at nearly 20 times forward earnings, are the most expensive among the Emerging Markets. Depressed returns from traditional risk-free instruments are also forcing savers to shift to risky assets in India.

“Record negative real interest rates have supported asset prices and some discretionary consumption,” said Ananth Narayan, senior India analyst at the Observatory Group, a research firm.

The past year saw an inflow of ₹3.8 lakh crore into equity funds, more than four times the foreign funds’ outflow. Furthermore, gold imports were at $50 billion.

A ‘durable’ economic recovery is RBI’s priority. But the recovery is uneven.

In the nine months ended December, profits of the top 4,200 companies doubled, while the GDP remained stagnant.

“While overall personal consumption is subdued, this masks the dichotomy between India’s booming ‘formal sector’ of larger companies (employing ~15% of India’s workforce) and struggling small businesses,” said Narayan of the Observatory Group.

The ultra-loose monetary policy has helped inflate financial assets benefiting the wealthy but not the less privileged. On the contrary, keeping such a policy stance for too long could hurt the less privileged and distort saving behaviour causing instability as it did in 2013, though the setting may be different.

“Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation. There is probably no other proposition in economics that is as well established as this one,” wrote Friedman.

Mint Road’s latest Occasional Papers, in a rare act published a review of The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, by Stephanie Kelton’s who junks most conventional economic theories.

Should that be seen as a definitive sign of a shift from Friedman?