Interest Rates (INDIA)...

Article;
RBI hikes repo-rate to7.5, reduces MSF rate to 9-5.

Comment

What a 25 basis point will do when inflation is in double digits? To be precise, the RBI, for every extra percentage of inflation, should increase interest rate by more than one percent (The Taylor-Rule). Therefore, if the RBI inflation-target is 5% and we have inflation rate of 10% we, at least, need to increase interest rate by 500 basis points. This is not unimaginable… Way back during 1970s, in the US, the Fed’s head Paul Volcker raised interest rate from 11% to 21%... But the unemployment rate rose to 10%. I do not know way back, then, in the US had the kind of unemployment-benefits it has, now. These benefits show our tolerance towards unemployment… Unluckily INDIA has no such mechanism that decides our tolerance towards inflation and luckily real-unemployment (deducting after the various types of unemployment) is not a big problem. It is near 6% (as per our FM), manageable. Therefore unlike the US, in the absence of any unemployment benefits, INDIA can tolerate less unemployment to let the prices cool down. I’m not expecting a knee-jerk reaction but during a slowdown when the source of income dries-up a lower inflation is like an ointment… I can easily expect the RBI to raise interest rates some more. Capitalists will be benefited by the action and the lay man’s relief due to lower prices.  Economists have a good image of “the” Paul Volcker…