FACT: Inflation is caused when demand increases supply. Be it food, (I guess the reason's for food price increase is worldwide, and not just India), be it Real Estate or Corporate Lending. The Reserve Bank should be looking medium term goals of increasing the supply. Short term goals of reducing the demand, will not help a developing nation like ours. This includes-
A)Cheaper loans for Housing institutions to build more houses, and not trying to stop them from selling more houses, that's absurd. That will stabilise the Real Estate from Speculations, and keep the demand supply balanced. 2) Better loans to genuine farmers for increasing farm productivity and not trying to constrict by increasing PLR by 400 BASIS Points. Retail should help in increasing farm productivity, but you need to protect the farmers rights.
3) With Capital a/c convertability, we see a large portion of Big Industrywala's taking loans from Hedge Funds( who source cheap credit from countries like Japan, and loan it to Industries in India.) But they do not risk putting money in "Pappu Halwai" or say a "Kakke da dhaba", who have modest plans to better their businesses/productivity. If we want the growth to percolate to the "Aam Admi", we have to control the SME and small scale lending of Financial institutions and not constrict that by high lending rates.
Yes productivity, increase will take time, but Mr. Chidambaram has to take bold steps in the right direction for that. I see the rate hikes as a very short term solution, and it should fall as soon as the other parameters ease.
