Wednesday, September 21, 2011

Can Low Interest Rate act as a poison for Inflation ????

Every citizen of the country is bearing the brunt of the inflationary effect on the prices of every commodity now days. The Whole Sale Price Index is about to reach the double digit mark in the upcoming months and the most astonishing fact is that the Central Bank (RBI) has stated that the high inflationary effect would be felt in the market for the next two to three months from now.
But in these turmoil times there came a news stating that the Chief Economic Advisor Kaushik Basu has pitched for a reduction in interest rates to maintain growth. This statement made by the Chief Economic Advisor was a sort of eye catchy statement.
He said this while referring to Turkey, which had managed to tide over the problem of high inflation by reducing interest rates in the high growth period. Basu’s comments came within days of the Reserve Bank of India (RBI) raising key interest rates by 25 basis points, the 12th increase in the last 18 months, to contain inflation, which has remained stubbornnly close to 10%.
It can be deciphered by Mr. Basu’s statement that in order to tame inflation it is not only necessary to hike the Interest rates rather thinking of something out of box, taking leads from successful models around the world and using the strategies in such ways that it leads to a successful impact is of no harm at all. But when the Chief Economic Advisor made such statements then is it really possible in a country where the scams of all magnitudes have almost sucked around 3 lac crore of rupees in the last 2 years.
To follow such successful models and to imply these strategies it is really important to even understand that Government’s role is extremely prominent. Corporate Governance and sticking to the ethics is the only way to follow the models which can lead to coming out of the vicious circle of inflationary prices all around.
In Turkey when the interest rates were lowered down people were blessed with more money in their hands and which gave them an option to invest in diversified fields and in short it boosted the economy and a stable stance of demand and supply was created in the market which directly or indirectly reduced the inflationary effect and brought the prices down at an affordable level. If our Central Bank takes such decision then it becomes the onus of the government to use the available currency for the people’s benefit and not for their own.
But will RBI take such a decision? Will government be able to create a way for a clean and trustworthy mechanism? Will Anna’s movement for the corruption-free state reap the results? And will RBI think of any other step of taming this inflationary Tiger which is on a roar amid the possibility of another interest hike by the Central Bank in the upcoming months?
For answers to all these questions we need to wait till the next step taken by the Apex Bank or will it resort to the same old strategy of the interest hike which is not reaping much results?

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