The government seems dead serious about corralling inflation. It cut customs duty on a variety of products, including cement, on Monday, temporarily banned futures trade in urad and tur on Tuesday, and cut duties on edible oils on Wednesday. Reserve Bank of India governor YV Reddy will unveil his anti-inflation armoury on January 31, when he undertakes a quarterly review of monetary policy.

While the finance ministry and central bank spend sleepless nights, FE caught up with Raghuram G Rajan, the Eric J Gleacher Distinguished Service Professor of Finance at The University of Chicago Graduate Business School, who was until December the IMF’s economic counsellor and director of research, for his views on sacrificing growth to contain inflation within a permissible band.

If he were the central banker, Rajan says, he would be very vigilant on inflation. “The RBI can’t forego the notion that growth is part of its mandate, but it has to be keenly aware that inflation tends to be a tax, which is most damaging to the poor. Not just politically very damaging, it is damaging to the country in a distributional sense too,” he adds.

While Rajan says inflation is largely a monetary phenomenon, the fiscal measures taken by the government do not really surprise him. “It suggests the authorities are concerned about inflation and are taking measures,” he notes.

The question really is, from where does this inflation stem. If it’s coming from excess demand, you will have to cut back. This will imply slowing growth somewhat. In the classic view, this shows too much demand chasing too few goods.

There are ways to alleviate these pressures. Some are being tried, including opening up the import route. But there are limits since India is running a reasonably large current account deficit, he points out. “At some point, there will have to be have a stark trade-off between helter-skelter growth but also high inflation and cut back on inflation at the expense of some growth,” Rajan says.

You don’t want to kill growth, but bring inflation within bounds. The danger of letting inflation go beyond the implicit band of 5-5.5% is it will become entrenched in people’s expectations. At 6.12%, it is already beyond the upper limit. How persistent is this and how much will lower oil prices feed in to bring it down, Rajan asks.