Interest Rates And Inflation In India: Issues And Concerns

About the Book

The Reserve Bank of India (RBI) increased interest rates 13 times during the period March 2010 to October 2011 in pursuit of tight money policy to control inflation. The banks raised their interest rates following the increase in their costs due to RBI policy rate hikes. But economists have called it a flawed approach as monetary measures alone cannot attend to all the causes that stoke inflation.

Large money supply is not the only cause of high inflation. There are supply side constraints with various types of goods produced, including food articles failing to meet the demand, pushing the prices up. The upward movement of international commodity prices, particularly crude oil, also leads to high inflation. The weakening of rupee against the dollar has hardened the prices further in India. Some social development programmes like MGNREGS, food and oil subsidies and other populist measures tend to increase demand and contribute to high inflation as also worsen the fiscal position. But monetary measures provide no solution to these problems.

While RBI's high interest rate policy has failed to tame inflation, it has adversely impacted India's economic growth. GDP growth for 2011-12 was lowered from 8 per cent to 7.6 per cent and then to 6.69 per cent. The Index of Industrial Production (IIP) data for different months of the year 2011-12 points to a dismal growth story.

Recognizing the fact that high interest rates were affecting growth, RBI reduced repo rate and reverse repo rate by 50 basis points each, on 17 April 2012. While this was a welcome step for the industry, it was felt that it may not cut much ice after a string of increases in the preceding two years. Besides, this reduction can hardly be construed as a policy change as inflation that showed some sign of let up in February and March 2012 reached uncomfortable levels in April 2012, with wholesale inflation rate surging to a worrisome 7.23 per cent and food inflation going as high as 10.49 per cent. The softening of food prices in December 2011 and January 2012 was due to seasonal supply, and not the result of RBI's high interest rate policy. With the change of season, the prices of vegetables, fruits, etc. have gone higher, to their previous levels. Such a scenario may stall any further moves by RBI to cut interest rates.

However, interest rates cannot be kept high indefinitely without inviting serious troubles like sluggish growth, low investment, increasing unemployment, economic slowdown and a possible downgrade.

The book delves into the problem of persistent high inflation in India for the last two years or so and looks at the measures taken by RBI in the form of increasing interest rates. It studies the impact of such a policy on India's GDP growth and industrial production and presents the current economic scenario which looks grim. It also suggests ways and means to tame inflation and to boost industry.

The book will prove highly useful for policymakers, parliamentarians and those concerned with India's socio-economic prosperity. To those who wish to know about the problem of inflation in India, its causes and cures, the book will provide for a richly rewarding and stimulating reading.