Actually, reviewing
monetary policy every six-week is not a good idea. In the first instance what
comes to mind, leave aside inflation and mathematical figures, that economy is
not stable and the growth prospects are bleak if it does not add to some
positive expectation either for consumers or producers. As an example, it is
possible to have both kind of expectation, positive and negative from a rise in
interest rate. A rise in interest rate can produce negative-expectations in
producers’ mind as we all know it increases the cost loan-able funds, and at
the same time it can produce a positive-expectation in consumers’/savers’ mind
that his savings are going to earn higher rate of interest-income. But as far
as, any Central-Bank all-over the world is concerned they are unable to foster
positive-expectations either in form of lower interest rate or higher interest
rate. Economics is a material science which starts with assumptions and ends
with mathematical-equations; I mean it’s so scientific.
We have all heard about
economic-stimulus but we hardly discuss economic-responses as
economic-responses, the jargon. You know stimulus is a term in Psychology and
its pair is response but a response can only be produced if the stimulus has a
particular threshold value. It’s like voltage, below which your refrigerator
will not work and at the proper voltage everything is all right and frequent
changes in voltage can disturb the system of your refrigerator. The RBI must
think to intervene every six-months or greater. I think that’s enough to make
my point.
To be quantitative. As
far as inflation is concerned, 15% is a high inflation-rate and to cool down
the prices the average of the interest rates on savings should be around 6-7%
for a deposit of six-months, a guess after looking at interest rate on savings
for different terms. Savings are a type of postponed consumption. Therefore,
instead of curbing demand altogether we can choose to postpone consumption by
increasing interest rate on short-term savings. And, as fa asr interest-rate on
investment is concerned we may choose them at level of 12-13% per-annum where
necessary to postpone production without resorting to layoffs. This was all i
could guess. (Used Bank of Baroda schemes)
An inflation rate of
10% is enough for policy action because not every body’s incomes rise every
year, especially, the labor-class. Labour-class wages tend to be sticky at
their current levels and a large chunk goes to feeding their stomach, and the
opposition in the labour market has a better negotiating power. Inflation is a
great concern for unorganized-labour. Inflation is not a problem for those with
savings above a particular value, but those below that value can do nothing or
loses their savings.The RBI can do nothing because it controls not prices,
which can largely be attributed to structural-problems and need direct
government intervention by fostering the supply chain. The RBI can only help in
postponing consumption but only with limits and those who save not enough to
even reach banks will not be profited by RBIs moves.
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