OPINION: Asset prices must guide monetary policy.

from BUSINESS LINE, September 04, 2009 If, when and how the RBI should tamper with the interest rates seems to be the second most discussed subject in business circles these days, after the public spat between the Ambani brothers. Most of the arguments, both for and against interest rate cuts, are fundamentally based on the inflation hypothesis (that is the level of inflation relative to its target). But inflation has time and again proved to be an insufficient indicator; especially given the way we measure it (CPI and WPI).

One thing that we have learnt, if at all, from the recent global financial crisis, is that, purely focusing on goods and services inflation does not work well in the context of setting interest rates. What we need is a new model, a more holistic approach to monetary policy that takes into account 'asset prices' and the resulting …