Friday, July 15, 2011

INFLATION, RISING INTEREST RATES - A THREAT TO THE INDIAN ECONOMIC GROWTH

The Reserve Bank of India has been keenly observing the rising inflation during last few months and is rightly concerned about the same. It is noted that the current inflation has mainly arisen in the items of basic necessity and specially the food inflation index and Oil prices have risen most.

The Reserve Bank of India has been following very tight monetary policy and has undertaken several steps to substantially reduce the liquidity of funds in the financial system. In addition to the above the RBI has continuously been raising REPO rate as well as reverse REPO rates during last several months. These policies have created an atmosphere in the financial system for hardening of interest rates. The banks have substantially increased the rate of fixed deposits and are severely competing with each other to attract more liquidity. On the other hand the rates of interest for lending have  also risen very substantially, thereby severely impacting a large number of infrastructure projects, power
projects, real estate projects as well as projects in the manufacturing sector. The non performing assets of the banking system are likely to rise substantially due to heavy interest burden. The sentiment of the Indian industry to plan for further expansion based on financial leverage have also been adversely affected. The companies whose plans are based on borrowing are re-considering the long term viability of the plans. The Indian economy has shown necessary resilience and sustained growth has been observed even after international slowdown. The government need to seriously consider that the tightening of liquidity coupled with so high interest rate may not result into slowing down of the economy. The impact of these issues may be observed only in next few months and in such a situation it will be very difficult to reverse the trend, in favour of growth again .

The Learned economists and intellectuals

may please consider that the current inflation, being experienced in India is not arising out
of excess money supply but is largely related to the food inflation or rising oil prices and
commodity prices in the international markets. The tightening of monetary policy cannot
impact such inflation directly. The time has come for RBI and Government of India to reconsider their policy.

A case for Rupee appreciation:

The export from India has touched a new height and a record growth rate has been observed in recent periods. The FII inflow as well as foreign exchange reserves are very comfortable . The RBI may consider to allow Indian rupee to appreciate to its realistic level so that the impact of international commodity market prices on the Indian prices can be suitably moderated. This will also help in tackling the inflation by reduced cost of imports. The increased demand for Indian commodities
internationally, including for sugar and other basic commodities, can also be addressed by making export of such commodities less attractive by firming up of rupee. It is also important for RBI to make adequate fund available at reasonably low cost for infrastructures and power sectors as well as for industries so that the growth momentum can take place effectively and efficiently. Looking into need for low cost houses, their funding need special push by the policy makers.

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