Article;
INDIA and the slowing economy Chidambaram squares-off RBI again.
Comment;
If people want to save more we should not try to manipulate
them... A higher level of savings would exert a downward pressure on interest
rate because supply (of capital) will increase... Good for investment... But
investment spending is a bit different... A Capitalist always compares his
return on savings in banks and the return from investment and invests only when
the return is higher than his savings in banks... Therefore a low rate of
interest will encourage the Capitalist to take risk... Higher interest rate in
this period will increase savings in this period and will lower interest in the
next-period… INDIA
is going through the first stage, inflation is high therefore we need higher
interest rate so that people consume less and save more… In the next stage,
when inflation is down due to higher interest rate in the previous period the
central bank would lower interest rate and Capitalist will find investment more
profitable… Higher savings in this period will always lower interest rate in
the next period but the only problem is high inflation… To restrict demand and
inflation we need higher interest rates… Higher interest rate on savings will
discourage investment spending, as already said above and also because high
interest rate itself, but savings would get benefit of higher interest rates…
The central bank should make investment a little unprofitable when compared to
savings in banks and by doing that it can target inflation a little better… i
think a 10% increase in growth, income and inflation would be compatible with
10% interest on savings in banks…
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