Growth Over Inflation...

Article;
RBI should hike rates even if it sacrifices economic-growth.

Comment;

RBI has not one but two big reasons to hike interest rates. Number one inflation which is above 9% but we do not consider CPI as an index for inflation. We have accepted WPI as a gauge of inflation, more appropriate for rate cuts. According to CPI both food and fuel inflation are above 10%... Therefore to bring down them near to 5% we need to raise interest rates. The second reason is falling rate of bank deposits. Our deposit rate is lower than our lending growth rate which is the second reason to tighten liquidity. They are discouraged because the interest rate they are getting for their savings is less than rate of inflation. I mean real interest rates (nominal interest rate minus inflation) have become negative. And, a third and well know reason for monetary policy tightening, these days,is our CAD. So far inflation was our biggest concern. Every  time growth picks-up in INDIA inflation reaches 10% and sometimes more than 10, as high as 20%, which points that inflation in INDIA is a structural problem and 10% inflation has become the “new” normal. If we accept CPI inflation as sticky only then we have a reason to soften interest rates or otherwise we have all the reasons to tighten liquidity conditions. But our growth concerns now (i think) have replaced the focus from inflation because everybody is now demanding higher income to cope with the rising prices to compensate for loss in value of purchasing power and savings…