This will only fuel further inflation for the reason (10 when credit becomes dearer, production comes down (2) When rupee strengthens it affects exports (c)As we are a POL importing nation and as the fule prices are raising every day, our fex reserve will come down (4) Cosequently when production falls, it will have effect on employment, rise in prices. Solution lies in finding out ways and means of increasing supply
RE:RBI steps to increase interest rates
by Rohit on Apr 08, 2007 05:51 AM Permalink
You have presented the strangest Economics Theories I have ever seen.
The build up of forex reserves creates inflationary pressure. India wants to reduce her massive forex reserves by appreciating the Rupee. When the Rupee appreciates it lowers the price of imports like oil and food. It also reduces exports and therefore reduces Aggregate Demand. Together this lowers inflationary pressures.
More importantly when interest rates appreciate people do not borrow as much to invest or to buy a car/house. This lowers aggregate demand which lowers prices.
Tis called Intro to Macroeconomics.
PLEASE read an Economics textbook and educate yourself. Most of my first yr college students can handle Samuelson and Nordhaus.
RE:RE:RBI steps to increase interest rates
by Balaji Viswanathan on Apr 10, 2007 07:18 AM Permalink
One sane post from whole bunch of trash here. RBI is trying to contain inflation from two angles - raise interest rates and allow rupee to appreciate.
India is flooded with foreign money and to mop out that much dollars, RBI introduces hundreds of billions of rupees every year into the market and this is one of the fundamental reasons for inflation. Now, by restricting the amount of dollars it buys, it is directly causing rupee to appreciate and counters the core inflation by reducing rupee supply. Indirectly, this will also reduce the import cost of oil & other materials contributing to a reduction in inflation.
Regarding interest rates, we are seeing a runaway growth in credit. Credit are of three types - loan for growth & investment (house, starting a company, etc), loan for depreciating assets (car) and loan for expenditures (electronics, grocery etc). Only, the first category of credit is healthy and the other two must be discouraged, while the third one should be totally avoided, ideally. We are having a spurt in personal loans indicating the latter two, and this habit has to be curbed. And our domestic industries like auto wont be hurt too much, as they can export anyway given a huge price advantage.
From the government perspective, the interest rates will hurt it most (it benefits from cheap loans and high inflation, being the biggest borrower) and high interest rates will discourage borrowing and bring more fiscal discipline.
For the corporates, the hike wont impact too much, as the big ones can easily access the vast bottomless pit of global liquidity from Japan and London at 1-5% rates. For smaller ones the hike will pinch, but will encourage greater savings and better efficiency. But, the government should do some sector specific sops to protect small enterprises and startups from super-high interest rates.
Overall, this short term interest pinch, will pull back the nation towards greater saving & investing, and curb unhealthy personal loans along with cooling the real-estate industry by restricting housing loans.
So, an interest rate hike is a long due, and will help in cooling the structural overheating that is showing in the form of fissures called inflation.
