India: The Rising Elephant

The CPI in the US has fallen by 1% in Oct 2008. This sparked off a conversation about deflation, its costs, causes, and implications.
The costs are clear. With falling prices, firms will find it more and more difficult to make profits or break even. Given low or negative profits, they will be forced to cut costs further. This moves into a deflationary spiral.
What are the policy implications? One of the worst hit areas in a deflationary spiral is of course, monetary policy. As real interest rates go to zero, monetary policy moves towards the liquidity trap (a situation where the interest rate transmission channel breaks down). In an open economy, there is an intuitive arbitraged relationship between exchange rates and interest rates under a concept called interest rate parity. Basically, if two countries have varying interest rates, the expected difference in their exchange rates will offset any arbitrage opportunities off of their differing interest rates. Zero interest rates spark off the risk of pressure on the dollar to depreciate.
Simple answer - print money. This is the argument of many economists, who say that printing money (expansionary monetary policy at its best) is the easiest way to combat deflation.
How does this relate to India? It doesn't. With our WPI inflation touching 8.99% (annual), policymakers seem to have relaxed a little regarding inflationary pressure. All focus is now on liquidity.