The Thresholds...

Article;
RBI may hike interest rate this week MSF rate cut likely.

Comment;

There is a disagreement among the economists about what decides “the right” level of interest rate in an economy? Is it inflation or unemployment, or both? We need higher interest rates to tame inflation and achieve full-employment… Full employment means maximum production of goods and services… Which together becomes the objective of price-stability and full-employment and the RBI has key rates to manage these two. If inflation is above the target we need to increase interest rates to fulfill the price-stability objective and if there unemployment in the economy we need to reduce interest rates, and, if there is full employment and inflation (like INDIA) we need to increase interest rate because it is only increasing the quantity of money and not employment. It is an effort-waste to pump money because it does not reduce real interest rates so that we can buy more (cheap) labor to increase production, there is full-employment… It will only increase wage, demand, and prices… And, if the RBI increases interest rates it will it divert resources for savings and investment. An attractive rate of interest is important to lure savings and investment… If lending growth rate is higher there will be an upward pressure on interest rates to attract savings, people will spend less and save more and employment and production will suffer, prices will fall. Interest-rate hike should be attractive enough to attract savings and strong, too, to reduce some investment and employment…