A Blanket Interest rate Hike will have The Worst Economic Impact in order to Curb Supply-side Inflation. It’s time The Finance Ministry took Micro and Macro Economics Revision Lessons from us
The second problem is RBI’s fetish for contractionary policies. As is well accepted globally, contractionary policies can work only when the inflation is a demand pull inflation (as raising interest rates and reducing money supply results in consumers having less disposable income, and taking lesser loans to purchase, say, houses). Unfortunately, food items in India are not of the luxuriant variety, which can undergo price jumps so suddenly and so uncontrollably simply because people have as suddenly and as uncontrollably started eating more – unless of course, as even World Bank head Robert Zoellick accepted this week, the inflation in India was much more due to supply side constraints. In such a case, tightening of monetary policy would end up destroying supply even further as businesses would stop investing.
So what should RBI do? Immediately initiate the practice of differential interest rates while providing money to borrowing banks, which would broadly mean three different interest rate slabs when the borrowing bank takes money – one, when the bank borrows money from RBI for providing loans to the agriculture sector, one for corporate sector and one for retail/end consumers. RBI should provide money to banks at lower rates (expansionary monetary policy) in case the banks are taking finances for subsequently providing loans to the agriculture or industrial sector. This will motivate supply growth. RBI should provide money to banks at higher or unchanged rates in case the banks are taking finances for providing loans to end consumers. This will proactively motivate savings and demotivate an increase in retail demand. At the same time, banks should be prohibited from charging increased interest rates from end consumers who have taken past loans. Protectionist surely; but when it is a question of the economy collapsing due to inflation rate jumps, a protectionist policy is any day more welcome than a contractionary one. Dada, try us out – one call and we’ll be at your service! And no, we’ll charge no interest for that.
So what should RBI do? Immediately initiate the practice of differential interest rates while providing money to borrowing banks, which would broadly mean three different interest rate slabs when the borrowing bank takes money – one, when the bank borrows money from RBI for providing loans to the agriculture sector, one for corporate sector and one for retail/end consumers. RBI should provide money to banks at lower rates (expansionary monetary policy) in case the banks are taking finances for subsequently providing loans to the agriculture or industrial sector. This will motivate supply growth. RBI should provide money to banks at higher or unchanged rates in case the banks are taking finances for providing loans to end consumers. This will proactively motivate savings and demotivate an increase in retail demand. At the same time, banks should be prohibited from charging increased interest rates from end consumers who have taken past loans. Protectionist surely; but when it is a question of the economy collapsing due to inflation rate jumps, a protectionist policy is any day more welcome than a contractionary one. Dada, try us out – one call and we’ll be at your service! And no, we’ll charge no interest for that.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
