Tuesday, July 27, 2010

Some Thoughts on Interest Rates

  RBI Willing to Strike, But Afraid to Hurt Again ... !!!

The RBI has once again announced  mild hikes of interest rates at the face of accelerating inflation. The repo and reverse repo rates  were hiked by 0.25 and 0.50 % respectively by the RBI today. The last hike did not lead to any hikes in the rates by the Banks on the ground. Going by the reaction of the markets, Tuesday's action too may become inadequate to tame the inflationary expectations. The RBI still expects the inflation to fall to 6 % levels by the next March. However, it may be remembered that inflation was expected to fall to 5.5% by the last March too. ( It seems that the base effect has not been bailing out the 'expert' predictors ! ) So much for the too accommodating policies of the present managers of economy.

Bye the way, no one needs to be an accomplished economist to understand the situation. Just check up the interest rates of one year bank deposits and compare it with the Government's own inflation figures. You can see that the interest rate is much below the inflation rate and therefore, the depositor actually loses his  purchasing power, by making the deposit. This is called negative interest rate and it kills the savings of the depositors and  robs the poor.   

Now, one may ask who are the beneficiaries of these negative interest rates. Of course the big borrowers including the government are the ultimate beneficiaries of the negative interest rates. Even though a bit of mild inflation is supposed to be good for growth in the economy, run away inflation may lead to bubbles and the subsequent busts as happened in the Nineties. The world has not yet been able to recover from the well known busting of the Greenspan bubbles. Do we need another one of the desi variety ?
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