Whether or not economics interest you, the increasing interest rates must have surely caused you some worries. Be it increasing rates on your EMIs or the further postponement of your plans to buy the dream house due to high home loan rates, RBI’s policies have surely impacted your dreams and desires. At one point of time you couldn’t blame RBI. When RBI started hiking rates last year in Q3, CPI inflation was soaring at 10% against the comfortable target level of 5% as desired by RBI. India was growing strong with GDP expected to grow at 8.9% despite weak economic sentiments world-wide. Rate hike was seen as a strong step which RBI expected would curb inflation and help restore normalcy to the heating economy.
The concept doesn’t seems to be working anymore on the back of lackadaisical effort on the part of the government to control supply side inflation and rising food prices causing the monetary policy to have minimal effect. Let’s look at a few data points to confirm that.
The above chart shows RBI’s increasing interest rate stance and action since October 2011. The borrowing rate has been increased from 5.0% to 7.5% in last 1 year with the intent to decrease supply of money in the market thereby controlling growth and hence inflation. The chart below shows that the growth rate did get affected with industrial production dipping and GDP growth rate declining to 7.7% for September ending quarter.
While all this was happening, the expected result of curbing inflation was not achieved. Inflation continuedto soar despite RBI’s continued efforts on monetary side, and reached 10.1% for October 2011.
What’s most painful to see is that the rises in interest rates are now accepted as routine with not much reaction from the stakeholders. This can be traced from the fact that for the past 3 rate hikes, the stock markets didn’t respond negatively because it was already factored in. The worst part is that whenever we do see some impact on the inflation dropping, government comes up with some price hike which further leads to dampening the effect of the RBI’s policy measures. This impacts the price of basic food items and other basic necessity items the most. The wholesale price index for food articles rose 12.21% year-on-year in the week to October 22, compared with 11.43% in the previous week, driven by soaring eggs, meat, fruits and milk prices. Overall food prices rose 0.70% over the previous week. Now with petrol prices further increased, inflation is nowhere going down.
On the back of it, it’s shameful to see our government and politicians playing politics on price hike. It’s disheartening to see statements from government taking no responsibility for price hikes. This is evident in Mr. Pranab Mukherjee’s statement- “Nobody in the government knows… because petrol prices are increased by the petroleum companies, not by the government. Diesel, kerosene and gas are controlled items.” While Diesel, kerosene and gas prices were also recently hiked by the government. The government seems to be numb to the woes of the common masses that are fighting with increased prices of commodities. It is as dismal as amusing to hear our Prime Minister who is also an economist saying that Food Inflation is a sign of growing prosperity. So he seems to have forgotten that it’s a classic case of rich getting richer and poor getting poor and further being hit by inflation. With the recent fall in value of rupee against dollar, multiple scams in the Indian growth story and hoards of black money in the economy RBI seems far off from a stable and cooled down economic environment with only monetary policy as a tool in its hand.
What is needed is a more proactive approach and sync between measures of RBI and government. Food inflation is here to stay for considerable time and it has to be adopted as a part of the strategy rather than to avoid it. Government has to become more accountable for improving supply side dynamics and should ensure minimal wastage of food and perishable items through effective supply chain and logistics put in place. Focus has to be drawn now on improving the growth and productivity of the country, which has suffered massively due to rate hikes and spiraling inflation. RBI on its end needs to come up with even innovate measures rather than just relying on interest rate hikes.