[Related to the Apply the Concept on page 543] According to an article on cnbc.com, the Reserve Bank of India
(RBI) was expected to lower its target interest rate at its
early 2017 monetary policy meeting, but instead the
RBI held its target constant. RBI Governor Urjit Patel
“pointed to concerns that a ‘fire sale’ in perishable foods
was distorting what could be a worrying outlook for
inflation.”
a. What is a “fire sale” in perishable foods, and why
would it distort the outlook for inflation?
b. If the RBI ignored the fire sale in perishable foods,
how might it be led to set the target interest rate at the
wrong level?
Source: Leslie Shaffer, “Forget Demonetization. India’s Central Bank
Is Worried about Inflation,’” www.cnbc.com, February 8, 2017.