The RBI has gone ahead with the umpteenth attempt at curbing inflation by raising policy rates by 50bps . This has upset the market men as the it exceeds the expectation. The Nifty is now under 5550 mark losing more than 125 points since the announcement.
Looking at the rationale of the RBI's action one thing comes to mind is that the interest itself is an input in the production process of every type of economic activity. Since the inflation is due to demand pressure it can only be eased by either shrinking demand or increasing supply. Shrinking demand is fraught with concerns about the employment generation capacity of the economy which will be hurt. Alternatively, the supply surge at cheaper cost can only come when the finance also cheaply available. So the situation puts us in a situation like being between the devil and deep see.
The choice in light of above should be on the side off being wrong on the side of not raising the interest rates. This is also due to the fact that incremental consumption demand is coming more from the section of population who are now joining the consumption club and enter it on strength of saving and not on bank finance.
If the foreign money is attracted due to high rates here , it will make rupee strong and will make a case for exports falling exports and higher local consumption. This is not a likable scenario in any case. If the restrictions are place in foreign capital inflows , it will be not in line with the present financial order of the world.
Our rate of saving is good by world's standard and if a part of it getting in to demand for goods , it shouldn't be made a point to curb the demand . The question remains how else the economy grow if not by higher demand and higher supply.
I am not against raising of bench-mark rates when the inflation rate rises but when after reasonable effort the inflation still remains high then the interest rate tool should be given a break.
Further the food inflation should not matter as it makes the majority in India gain economic might , only thing that the poors having fixed or no income should get direct relief. We have such capacity which is mostly not invoked due to apathy of the political class. The political class is only for those who have some organised voting clubs and not for the lowliest of the people on the economic ladder.
Lastly, the high interest rates at the behest of govt would not make the interest rate in economy go up ie the demand for fund will diminish and the increased liquidity will be absorbed by industry at only a reasonable rate. This will put pressure on bank's spread and will be good thing to happen. In today's times the cost of inter-mediation should be minimal unlike the manner in which the banks of all hues have started to milch the customer.
I think the basics of economy will get adjusted sooner that expected and the interest rate scene will be irrelevant for the markets...kbk
Looking at the rationale of the RBI's action one thing comes to mind is that the interest itself is an input in the production process of every type of economic activity. Since the inflation is due to demand pressure it can only be eased by either shrinking demand or increasing supply. Shrinking demand is fraught with concerns about the employment generation capacity of the economy which will be hurt. Alternatively, the supply surge at cheaper cost can only come when the finance also cheaply available. So the situation puts us in a situation like being between the devil and deep see.
The choice in light of above should be on the side off being wrong on the side of not raising the interest rates. This is also due to the fact that incremental consumption demand is coming more from the section of population who are now joining the consumption club and enter it on strength of saving and not on bank finance.
If the foreign money is attracted due to high rates here , it will make rupee strong and will make a case for exports falling exports and higher local consumption. This is not a likable scenario in any case. If the restrictions are place in foreign capital inflows , it will be not in line with the present financial order of the world.
Our rate of saving is good by world's standard and if a part of it getting in to demand for goods , it shouldn't be made a point to curb the demand . The question remains how else the economy grow if not by higher demand and higher supply.
I am not against raising of bench-mark rates when the inflation rate rises but when after reasonable effort the inflation still remains high then the interest rate tool should be given a break.
Further the food inflation should not matter as it makes the majority in India gain economic might , only thing that the poors having fixed or no income should get direct relief. We have such capacity which is mostly not invoked due to apathy of the political class. The political class is only for those who have some organised voting clubs and not for the lowliest of the people on the economic ladder.
Lastly, the high interest rates at the behest of govt would not make the interest rate in economy go up ie the demand for fund will diminish and the increased liquidity will be absorbed by industry at only a reasonable rate. This will put pressure on bank's spread and will be good thing to happen. In today's times the cost of inter-mediation should be minimal unlike the manner in which the banks of all hues have started to milch the customer.
I think the basics of economy will get adjusted sooner that expected and the interest rate scene will be irrelevant for the markets...kbk
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