Rates Unchanged - RBI's Dec'13 Policy Review

Well any central bank has the onus of regulating the money supply in the economy keeping a tab on the inflation. But somehow I fail to understand that, how can one tame inflation by inflation? By increasing rates the household budgets are inflated immediately. How can one tame inflation by just increasing the interest rates?

Simply stated, when RBI decides to increase rates, it tries to restrict the money supply in the economy, by making it more expensive to borrow, and thereby anticipating that the inflation will come down in prospect.

But food inflation does not exist due to excessive money supply. People don’t necessarily take loans to buy food articles, THINK! Food inflation occurs primarily due to non-existent infrastructure in the farm-to-fork logistics chain. Food inflation may also be caused due to illegal hoarding, as was seen recently in the case of onions, or due to unruly weather. The RBI can’t fight food inflation by snowballing rates. It has got only policy rates to play around with, and nothing much as a firearm to control inflation.

RBI should not meddle with INR - the new media hoopla !

As suggested earlier in my blogs that the INR should be allowed to float free and it will be best that it finds its own inherent value. Not only country’s CAD has evaporated at the levels which the INR has brushed over the period of last month, but the trade deficit too has significantly diminished.

 

This could only have been possible with the depreciation of the INR, though some would argue that this depreciation would cause inflationary pressures. But these pressures shall be short term which will subside over a longer term. The currency’s depreciation will have miniscule effect on the inflation as a whole.

It has been proved since time immortal that a weak currency always helps in the exports, whatever little may it be. It eventually adds up to the growth of a nation.

RBI - Raghuram Rajan's new joke !

The Finance Ministry recently announced that it will provide banks with additional liquidity so as to finance cheap loans for automobiles & consumer goods this festive season; to help the middle class population of our country. Though announced by the Fin-Min, but what is amusing and surprising is that this was done after taking a nod from the RBI governor. Ahem!

The RBI governor who in his previous review of the monetary policy said that it is imperative for the RBI to target and fight inflation first and then look for recovery and growth in the economy had hence increased repo rate by 25bps. This was seen as a move to reduce and contain inflation, which is still at a level more than the reserve banks comfort level. And then soon Fin-Min announces a release of liquidity into the system by providing cheap loans.

Even a naïve will know

INR @ 58 to a US Dollar

The INR touched never before seen levels against the U.S. Dollar. It touched levels of 58 today. Also there is no dearth of analysts predicting further gloom for the INR. The reasons are the same which have been repeated time and again, High CAD & Fiscal Deficit coupled with policy inaction. Also sometimes there is a talk about the worldwide recession.

These factors have been present for some time now. But has the Indian Govt. thought about it seriously. Or is everyone too busy struggling to keep their powers/posts intact, which is now evident from a recent spat in one the political party for the top spot.

Whatever the finance ministry or the RBI claim about the health of Indian Economy, the way INR has tumbled against U.S. Dollar today (close to 1.5% down in a single day)

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