It is what is called monetary policy of RBI. They reduces the interest rate when the GDP growth goes down so that people takes loan to spend as also there is li'l benefit saving money. But when GDP grows fast, normally it results high inflation. Then RBI has no other options but to brake the demand for goods and services by increasing the interest rates thus by encouraging savings. In fact the RBI move was slow as already inflation has gone past beyond all kind of reasonable levels. While middle class may brag about housing loans and savings etc, lower mid class and poorer ones had to fight for a square meals as prices of all essential articles incl food had gone much beyond any desirable extent. Pulses and rice etc had increased by 25-50% in last 1 yr, vegetables risen by 50-100%. That hurts everyone. Hence RBI has no other options but to reduce demand by tightening money supply to the system and one most effective tool central banks all over the world uses is raising the interest rates. So try to adjust to the scenario as far as possible, and for who can't afford simply should sell and move to a cheaper house.
RE:Reverse cycle
by suresh chawdhary on Apr 09, 2007 02:38 PM Permalink
Manjil babu, well said that this is for poors to buy their bread and butter if the rate of interest has increased and RBI has done that with consent of government and cabinet ministers. Tell me this
What is the effect of increasing the interest rates? has inflation gone down, it's still hovering at 6.5% from last 2-3 months when interest rates were low comparitively.
Government is inefficient in controlling prices which doesn't mean that they everytime increase rates of interest and think that inflation will come down.
Your GDP logic is not acceptable as China is growing faster than us but they don't have these issues there, why???
Kamalnath is involved in the scam for SEZ's and increase in prices of pulses and necessary things, can you control that as well by increasing rate of interest?
RE:Reverse cycle
by soms on Apr 10, 2007 03:35 PM Permalink
You are correct..this is old ecomnomic thinking that increase in interest rate will bring down inflation..but we need to thing on upto what extent it will impact..defn this increase in rates will impact real estate prices and auto industry..but as far other goods there is not going to be much of improvement. especially agri goods price will come down only with increase in prod..which because of the sez land grabing n india is going down..govt has not done enuf to improv agri prod..only if our agri growth reaches 2 figure (> 10 %) we will have some respite in prices of agri commodities.
